               ARMED SERVICES BOARD OF CONTRACT APPEALS

Appeal of--                                  )
                                             )
Hanley Industries, Inc.                      )      ASBCA No. 56584
                                             )
Under Contract No. W52P1J-05-C-0076          )

APPEARANCE FOR THE APPELLANT:                       Ryan K. Manger, Esq.
                                                     Manger Law, LLC
                                                     St. Louis, MO

APPEARANCES FOR THE GOVERNMENT:                     Raymond M. Saunders, Esq.
                                                     Army Chief Trial Attorney
                                                    Brian E. Bentley, Esq.
                                                    CPT Tudo N. Pham, JA
                                                     Trial Attorneys

                   OPINION BY ADMINISTRATIVE JUDGE PAUL

       This is a timely appeal of a contracting officer's (CO's) decision terminating
appellant Hanley Industries, Inc.'s (Hanley's) supply contract for default. The Contract
Disputes Act of 1978, 41 U.S.C. §§ 7101-7109 is applicable. In a decision promulgated
on 29 November 2012, the Board denied the government's motion for summary
judgment. 13 BCA ii 35,195. Familiarity with that decision is presumed.
Subsequently, a five-day hearing was held in St. Louis, Missouri.

                                 FINDINGS OF FACT

        1. On 29 September 2005, the U.S. Army Sustainment Command (Army) issued
Contract No. W52P1J-05-C-0076 to Hanley to supply 37,718 MK45-1 Electric Primers
(R4, tab 1 at 1-3). The MK45 primer initiates the propelling charge for shells fired from
U.S. Naval warships (compl. and answer ii 2). 13 BCA ii 35,195 at 172,685. The
firm-fixed-price contract had a total contract amount of $1,870,812.80 with a unit price of
$49.60 for each of the primers. The negotiated contract included four option years with
unit prices as follows: FY06, $49.63; FY07 $51.30; FY08 $53.04; and FY09, $54.84.
(R4, tab 1 at 1-3)

       2. The contract incorporated standard FAR and DF ARS clauses by reference,
including FAR 52.249-8, DEFAULT (FIXED-PRICE SUPPLY AND SERVICE) (APR 1984) (R4,
tab 1 at 36). The contract specifically provided that FAR and DFARS clauses which
were incorporated by reference, "the full text of which will be made available upon
request, [have] ... the same force and effect as if set forth in full text" (id. at 15).

       3. The contract included, in full text, the Local 52.246-4506, STATEMENT OF
WORK FOR STATISTICAL PROCESS CONTROL (FEB 1999) clause, also known as SPC. That
clause described in great detail Hanley's responsibilities including its "commitment to
continuous process improvement." Various subsections of the clause set forth
requirements for, inter alia, "SPC Training," "Manufacturing Controls," "Determination
of SPC Use," "Process Stability and Capability," "Control Chart Policy,"
"Vendor/Subcontractor Purchase Controls," "SPC Audit System," "SPC Records," and
"Control of Process/Operation Parameters or Characteristics" (id. at 8-10).

     4. Also included in the contract was the Local 52.209-4511, FIRST ARTICLE TEST
(GOVERNMENT TESTING) (MAY 1994) clause, which provided:

                     a. The first article shall consist of: ONE HUNDRED
              THIRTY MK 45 MOD 1 PRIMERS AND 5 EACH OF
              EVERY COMPONENTS PART AND SUBASSEMBLY
              (LESS EXPLOSIVE COMPONENTS) PER MIL-P-18714
              REV D, AMENDMENT 1 AND ADL 10001-2434755K;
              which shall be examined and tested in accordance with
              contract requirements, the item specification(s), the Quality
              Assurance Provisions (QAPS) and drawings listed in the
              Technical Data Package.

                     b. The first article shall be delivered to:
              SEVENTY-FOUR COMPLETE MK 45 MOD 1 PRIMERS
              TO: NAVAL SURFACE WARFARE CENTER,
              DAHLGREN DIVISION, 17320 DAHLGREN ROAD,
              DAHLGREN, VA 22446-5100/FITY [sic ]-SIX COMPLETE
              PRIMERS AND FIVE EACH OF EVERY COMPONENT
              PARTS AND SUBASSEMBLY (LESS EXPLOSIVE
              COMPONENTS) TO: NAVAL SURF ACE WARF ARE
              CENTER, IDIAN [sic] HEAD DIVISION, 101 STRAUSS
              A VENUE, INDIAN HEAD, MD 20640. The first article
              shall be delivered by the Contractor Free on Board (FOB)
              destination except when transportation protective service or
              transportation security is required by other provision of this
              contract. If such is the case, the first article shall be delivered
              FOB origin and shipped on Government Bill of Lading.




                                               2
        c. The first article shall be representative of items to
be manufactured using the same processes and procedures as
contract production. All parts and materials, including
packaging and packing, shall be obtained from the same
source of supply as will be used during regular production.
All components, subassemblies, and assemblies in the first
article sample shall have been produced by the Contractor
(including subcontractors) using the technical data package
provided by the Government.

        d. Prior to delivery, each of the first article assemblies,
subassemblies, and components shall be inspected by the
Contractor for all contract, drawing, QAP and specification
requirements except for any environmental or destructive
tests indicated below: NIA. The Contractor shall provide to
the Contracting Officer at least 15 calendar days advance
notice of the schedule date for final inspection of the first
article. Those inspections which are of a destructive nature
shall be performed upon additional sample parts selected
from the same lot(s) or batch( es) from which the first article
as selected. Results of contractor inspections (including
supplier's and Vendor's inspection records when applicable)
shall be verified by the Government Quality Assurance
Representative (QAR). The QAR shall attach to the
contractor's inspection report a completed DD Form 1222.
One copy of the contractor's inspection report with the DD
Form 1222 shall be forwarded with the first article; two
copies shall be provided to the Contracting Officer. Upon
delivery to the Government, the first article may be subjected
to inspection for all contract, drawing, specification, and QAP
requirements.

        e. Notwithstanding the provisions for waiver of first
article, an additional first article sample or portion thereof,
may be ordered by the Contracting Officer in writing when (i)
a major change is made to the technical data, (ii) whenever
there is a lapse in production for a period in excess of 90
days, or (iii) whenever a change occurs in the place of
performance, manufacturing process, material used, drawing,
specification or source supply. When conditions (i), (ii), or
(iii) above occurs, the Contractor shall notify the Contracting



                                3
             Officer so that a determination can be made concerning the
             need for an additional first article sample or portion thereof,
             and instructions provided concerning the submission,
             inspection and notification of results. Costs of the first article
             testing resulting from production process change, change in
             the place of performance, or material substitution shall be
             borne by the Contractor.

                    f. Rejected first articles or portions thereof not
            destroyed during inspection and testing will be held at the
            government first article test site for a period of 30 days
            following the date of notification of rejection, pending receipt
            of instructions from the Contractor for the disposition of the
            rejected material. The Contractor agrees that failure to
            furnish such instructions within said 30 day period shall
            constitute abandonment of said material by the Contractor
            and shall confer upon the Government the right to destroy or
            otherwise dispose of the rejected items at the discretion of the
            Government without liability to the Contractor by reason of
            such destruction or disposition.

(R4, tab 1at15-16)

      5. In addition, the contract contained the Local 52.245-4537, ACCEPTANCE
INSPECTION EQUIPMENT (AIE) (FEB 2002) clause, which stated:

                    a. Acquisition, maintenance, and disposition of
             Acceptance Inspection Equipment (AIE) shall be in
             accordance with ANSl/NCSL Z540-1 or ISO 10012-1. AIE
             shall be used to assure conformance of components and end
             items to contract requirements. AIE shall include all types of
             inspection, measuring, and test equipment whether
             Government furnished, contractor designed, or commercially
             acquired, along with the necessary specifications, and the
             procedures for their use.

                    b. The Contractor shall provide all Acceptance
             Inspection Equipment (AIE) necessary, except for the
             Government Furnished Equipment (GFE) listed in paragraph
             (g.8). The GFE shall be provided in accordance with the
             Government Property clause of this contract. The Contractor is
             responsible for contacting NSWC Corona at least 45 days in



                                             4
advance of the date the GFE is required to schedule delivery.
Government furnished AIE shall not be used by the contractor
or his subcontractor in lieu of in-process or work gages.

        c. Contractor AIE designs, specifications, and
procedures for Critical, Major, Special, and Minor
characteristics shall.be submitted to the Government for
review and approval in accordance with the Contract Data
Requirements List, DD Form 1423. All Contractor AIE
documentation requiring Government approval shall contain
sufficient information to permit evaluation of the AIE's
ability to test, verify or measure the characteristic or
parameter with the required accuracy and precision.
Contractor designed AIE requiring Government approval
shall be made either in accordance with the equipment
drawings specified in section C of contract
(Description/Specification Section), or in accordance with
any other design documentation provided that it is approved
by the Government. The Government will approve the AIE
documentation or provide requirements for approval within
45 days of receipt. The Contractor shall be responsible for
any delays resulting from late submission of AIE
documentation to the Government for approval, and any
delays resulting from the submission of inadequate or
incomplete AIE documentation.

       d. The contractor must ensure that all AIE is approved
and available for use prior to First Article Submission, if First
Article is required, or prior to initiation of production under
this contract.

       e. Resubmission of AIE design, specification, and
procedure documentation for approval on a follow-on
contract is not required provided inspection characteristic
parameters specified in the current technical data package and
the previously approved AIE documentation remain
unchanged. The contractor shall provide the contract number
and identify previously approved AIE documentation that
meets the above prerequisites.




                                5
       f. The Government reserves the right to disapprove at
any time during the performance of this contract, use of any
AIE not meeting the requirements of the approved design,
specification, or procedure documentation.

       g. Navy Special Interface Gage Requirements (NSIG)

       1. The Navy Special Interface Gages listed under this
clause will be forwarded to the Contractor for joint use by the
Contract Administration Office (CAO) and the Contractor.

        2. The Contractor may substitute contractor designed
and built AIE for the NSIG noted as applicable in paragraph
(g)(8). However, the designs require Government approval
and the contractor AIE hardware requires Government
certification. AIE designs shall be submitted in accordance
with paragraph (c). The contractor shall notify NSWC Corona
prior to submission of AIE for certification. Two copies of
each Government approved contractor AIE drawing shall
accompany the contractor AIE hardware sent to the
Government for certification. The Government shall perform
the contractor AIE certification, return the hardware and
provide notification of acceptance or rejection to the
Contractor within 45 days of receipt of the contractor AIE.
The contractor shall be responsible for any delays resulting
from late submission of documentation or hardware. The
Contractor shall also submit the calibration periods for each
contractor AIE for approval. The Government shall affix
Calibration stickers to the contractor AIE for Quality
Assurance Representative (QAR) identification.

        3. The NSIGs are provided for verification of selected
interface dimensions and do not constitute sole acceptance
criteria of production items or relieve the Contractor of
meeting all drawing/specification requirements under the
contract.

       4. Items that fail to be accepted by the applicable
NSIGS may be inspected by another means to determine
acceptance or rejection, provided the alternate inspection
method is acceptable to the government approval authority.



                               6
       5. The Government shall not be responsible for
discrepancies or delays in production items resulting through
misuse, damage or excessive wear to the NSIGs.

        6. Calibration and repair of the NSIGs shall only be
performed as authorized by the Naval Surface Warfare Center
(NSWC), Corona Division. Repair is at no cost to the
Contractor unless repair is required due to damage to the
gages resulting from Contractor fault or negligence.
Damaged, worn, or otherwise unserviceable NSIGs shall be
brought to the immediate attention of the CAO and NSWC
Corona. The Contractor shall not make any adjustments,
alterations or add permanent markings to NSIG hardware
unless specified by the NSIG operating instructions or
authorized by the Designated Technical Activity.

      7. Within 45 days after final acceptance of all
production items, the NSIGs shall be shipped to NSWC,
Corona Division, ATTN: Receiving Officer, Bldg 575, Gage
Laboratory, 1999 Fourth St., Norco, CA 92860-1915.

The following specifications are applicable:

       (i) Shipping, MIL-STD-2073, "DOD Standard Practice
for Military Packaging"

       (ii) Marking, MIL-STD-129, "Marking for Shipment
and Storage".

       8. The following NSIGs shall be provided and are
mandatory for use except as noted by an (x) for paragraph
(g.2) applicability.




                              7
Para.
g.2
applies   Drawing Rev    Char         NSIG         Qty Dimensions      Weight   Value
          685477 N       Ml05         6117015      3   l .75xl         21b      $1,000
                                      Pitch Dia.        .7286
                         M106         6117009      3   1.75x3          2lb      $1,500
                                      o dia.006
                         M107         6117015      3     1.75xl        2lb      $1,000
                                      o dia.005
          1275047 N      Ml07         3030384      3     10x10x12      60lb     $4,200
                                      o dia.001
                         M108         3236972      3    3x5            5lb      $2,000
                                      o dia.002
                         MllO         3030939      3    3x3x3          2lb      $190
                         Mill         3236972      3      3x5                   $2,000
                                      o dia.002
                         Ml21         3236972      3       3x5         5lb      $2,000
                                      o dia.005
                         M122         3236973            lx2.5         llb      $200
                                      o dia.005
                         Ml18         6117014      3    .75xl .12      llb      $200
                                      o dia.005
          2434755 M      Ml04         3030396      3     lxlx3         llb      $200
                         .000 Min
                         M105     3030936          3     lxlx3         llb      $200
                         .018MAX

(R4, tab 1at16-17)

     6. Also contained in the contract was the Local 52.246-4506, STATISTICAL PROCESS
CONTROL (SPC) (FEB 2004) clause, which provided:

                     a. In addition to the quality requirements of the
             technical data package, the Contractor shall implement
             Statistical Process Control (SPC) in accordance with a
             government accepted SPC Program Plan. Control chart
             techniques shall be in accordance with the American National
             Standards Institute (ANSI) Bl, B2 and B3. Alternate SPC
             charting methods may be proposed and submitted to the
             Government for review.




                                          8
        b. The SPC Program Plan developed by the contractor
shall consist of a general plan and a detailed plan. The plans
shall be structured as delineated on the Data Item Description
referenced in the DD Form 1423. The general and the
detailed plans shall be submitted to the government for
review per DD Form 1423 requirements. Notification by the
Government of acceptance or nonacceptance of the plans
shall be provided in accordance with the timeframes specified
on the DD Form 1423. Once a general plan for a facility has
been approved by this Command, the approval remains in
effect for subsequent contracts as long as the contractual
requirements remain substantially unchanged from contract to
contract. Therefore, resubmission of a previously accepted
general SPC plan is not required if current SPC contract
clause and Data Item Description (DID) requirements are
fulfilled. If this Command has previously accepted the
general SPC plan under essentially the same SPC contractual
requirements, so indicate by providing the Contracting
Officer with the following information:

       Date of Acceptance _ _ _ _ _ __

       Contract Number(s) _ _ _ _ __

        c. The contractor is responsible for updating the
general plan to current SPC contractual requirements. If
errors or omissions are encountered in a previously accepted
SPC general plan, opportunities for improvement will be
identified by the Government, and corrective action shall be
accomplished by the contractor.

        d. A milestone schedule will be submitted for those
facilities that do not have, or have never had, a fully
implemented SPC program and will not have a fully
operational SPC program once production is initiated. The
milestones shall provide a time-phased schedule of all efforts
planned relative to implementation of an SPC program
acceptable to the Government. A milestone schedule shall
include implementation start and complete dates for those
SPC subjects addressed in Part II of this clause. The
milestone schedule shall only include those actions that
cannot be accomplished prior to first article or the initiation



                               9
of production, if a first article is not required. Milestones
shall be developed for each commodity identified for SPC
application. Milestones shall be submitted through the
Government Quality Assurance Representative to the
Contracting Officer for review and acceptance. Any
deviations from the accepted milestones, to include
justification for such deviations, shall be resubmitted through
the same channels for review. The Government reserves the
right to disapprove any changes to the previously accepted
milestones. Notification by the Government of the
acceptance or non-acceptance of the milestones shall be
furnished to the Contractor by the Contracting Officer.

       e. The Contractor shall review all process and
operation parameters for possible application of SPC
techniques. This review shall include processes and
operations under the control of the prime contractor and those
under the control of subcontractor or vendor facilities. A
written justification shall be included in the detailed plan for
each process and operation parameter that controls or
influences characteristics identified as critical, special, or
major which have been deemed impractical for the
application of SPC techniques. A pamphlet on application of
SPC for short production runs is available through the
Contracting Officer.

       f. Statistical evidence in the form of control charts
shall be prepared and maintained for each process or
operation parameter identified in the detailed plan. These
charts shall identify all corrective actions taken on statistical
signal. During production runs, control charts shall be
maintained in such a manner to assure product is traceable to
the control charts. At the conclusion of the production run, a
collection of charts traceable to the product, shall be
maintained for a minimum of three years. The control charts
shall be provided to the Government for review at any time
upon request.

       g. When the process or operation parameter under
control has demonstrated both stability and capability, the
Contractor may request, in writing, through Administrative
Contracting Officer (ACO) and Contracting Officer (CO)



                                10
channels to the Product Assurance and Test Directorate, that
acceptance inspection or testing performed in accordance
with contract requirements be reduced or eliminated. Upon
approval by the CO, acceptance shall then be based upon the
accepted SPC plan, procedures, practices and the control
charts.

        h. The Government will not consider requests for
reduction or elimination of 100% acceptance inspection and
testing .. .if any one of the following conditions exists:

        ( 1) The existing process currently utilizes a fully
automated, cost effective, and sufficiently reliable method of
100% acceptance inspection or testing for an attribute-type
critical parameter or characteristic.

      (2) The Contractor utilizes attribute SPC control chart
methods for the critical parameter or characteristic.

        (3) The critical parameter or characteristic is a first
order, single point safety failure mode (nonconformance of
the critical parameter or characteristic in and of itself would
cause a catastrophic failure).

       i. The Government will only consider reduction or
elimination of the 100% acceptance inspection or test
requirement for other critical parameters or characteristics if
either of the following conditions is met:

        (1) The process is in a state of statistical control
utilizing variable control chart methods for the critical
parameter or characteristic under control and the process
performance index (Cpk) is at least 2.0. The Contractor shall
maintain objective quality evidence through periodic audits
that the process performance index is being maintained for
each production delivery.

        (2) The critical parameter or characteristic is
conclusively shown to be completely controlled by one or
more process or operation parameters earlier in the process,
and those parameters are in a state of statistical control
utilizing variable data, and the product of the probability of



                               11
the conformance for each earlier parameter associated to the
critical characteristic is better than or equal to a value
equivalent to that provided by a Cpk of at least 2.0. The
Contractor shall maintain objective quality evidence through
periodic audits that the process performance indexes are
being maintained for each production delivery.

       j. For characteristics other than critical, requests for
reduction or elimination of acceptance inspection and testing
shall be considered when the process performance index is
greater than or equal to a Cpk of 1.33 for variables data.
Requests shall be considered for attributes data when the
percent beyond the specification limits is less than or equal to
.003 (Cpk=l.33).

       k. Process or operation parameters under reduced or
eliminated inspection or testing that undergo a break in
production less than 6 months in length, may continue to
operate under reduced or eliminated inspection or testing
provided there has been no degradation below a Cpk of 1.33
(2.0 for criticals). Any break in production greater than 6
months shall require resubmission of the request for reduction
or elimination of inspection or testing through the same
channels cited in paragraph (g) above.

       1. Not used.

        m. Immediately following a change to a process or
operation parameter under reduced or eliminated inspection,
the process capability (Cp) or process performance indexes
(Cpk) shall be recalculated and documented for variable data;
the grand average fraction defective shall be recalculated for
attribute data. If any of these values have deteriorated,
immediate notification shall be made to the Government
along with the associated documentation. Return to original
inspection and test requirements may be imposed as
stipulated in paragraph n below.

       n. The Government reserves the right to withdraw
authorization to reduce or eliminate final acceptance
inspection or testing and direct the Contractor to return to
original contract inspection or test procedures at any



                               12
              indication of loss of process control or deterioration of
              quality.

(R4, tab 1 at 17-19)

     7. In addition, the contract included the Local 52.246-4530, SUBMISSION OF
PRODUCTION LOT SAMPLES (GOVERNMENT TESTING) (MAY 1994) clause, which provided:

                     a. A lot acceptance test sample is required to be
              submitted by the Contractor from each production lot
              tendered to the Government for acceptance. This sample
              shall consist of: ONE HUNDRED FIVE MK 45 MOD 1
              PRIMERS PER MIL-P-18714 REV D, AMENDENT 1 AND
              ADL 10001-2434755K. The sample units shall be delivered
              by the Contractor Free on Board (FOB) destination, except
              when transportation protective service of transportation
              security is required by other provision of this contract. When
              such is the case, the sample units shall be delivered FOB
              origin and shipped to the test facility identified below on a
              Government Bill of Lading for the following tests:

              TEST

                  AS SPECIFIED IN TABL 1 OF MIL-P-18714 REV D
              W/AMEND 1 DETAIL STRIP, BLACK POWDER AND
              PACKING

              REQUIREMENTS

              RADIOGRAPHIC, ELECTRICAL RESISTANCE,
              FUNCTIONAL, BALLISTIC

                       SAMPLE-

             FORTY-NINEMK45MOD1 PRIMERS TONSWC
             DAHLGREN AND FIFTY-SIX MK 45 MOD 1 PRIMERS
             TO NSWC INDIAN HEAD

             TEST FACILITY:

             NAVAL SURFACE WARF ARE CENTER,
             DAHLGREN DIVISION



                                             13
17320 DAHLGREN ROAD
DAHLGREN, VA 22446-5100

NAVAL SURFACE WARFARE CENTER, INDIAN HEAD
DIVISION
101 STAUSS AVENUE
INDIAN HEAD, MD 20640

       b. When the production lot sample consists of
components parts which require uploading at a Government
Load, Assemble, and Pack (LAP) facility, and a shipping
address is provided below, the contractor shall ship the
sample units as specified above directly to the LAP facility.
The LAP facility, upon completion of the uploading, will be
responsible for shipping the samples to the tests facility
indicated above in paragraph (a).

LAP FACILITY: NIA

       c. The sample units shall be randomly selected from
the entire lot by or in the presence of the Government Quality
Assurance Representative. Unless otherwise specified, the
sample units are considered to be destructively tested and are
in addition to the units deliverable under the contract.

       d. Prior to selection of the sample units, the lot shall
have been inspected to and meet all other requirements of the
contract. A sample shall not be submitted from a lot rejected
for nonconforrnance to the detailed requirements of the
specifications) and drawing(s) unless authorized by the
Contracting Officer.

        e. Unless authorized by the Contracting Officer, the
lot from which the samples are drawn shall not be shipped
until official notification has been provided by the
Contracting Officer that the tested units have satisfactorily
met the established requirements. Final acceptance of the lot
shall not proceed until such notification has been provided.

        f. If the production lot sample contains samples for
ballistic testing, the test samples shall be identified as such on
the outer packs and the applicable Ballistic Test Request



                                14
(BTR) number shall be stenciled on all outer packs and
included on all shipping documents.

       g. The Contracting Officer shall by written notice to
the Contractor within 45 days after receipt of the sample units
by the government, approve, disapprove, or conditionally
approve the lot acceptance sample.

        h. If the production lot sample fails to meet applicable
requirements, the Contractor may be required at the option of
the Government, to submit an additional production lot test
sample for test. When notified by the Government to submit
an additional production lot test sample, the Contractor shall
at no additional cost to the Government make any necessary
changes, modifications, or repairs and select another sample
for testing. The additional test sample shall be furnished to
the Government under the terms and conditions and within
the time specified in the notification. The Government shall
take action on this test sample within the time limit specified
in paragraph (g) above. All costs associated with the
additional testing shall be borne by the Contractor.

       i. If a ballistic test sample fails to meet contractual
performance or functional requirements, the Contractor shall
reimburse the Government for transportation costs associated
with the failing sample, including the cost of transportation
protective service and transportation security requirements
when such security is required by other provision of this
contract. An exception to this requirement for reimbursement
of Government transportation costs will occur if the
Government determines that the functional test samples failed
to meet contractual performance requirements through no
fault of the contractor.

       j. If the Contractor fails to deliver any production lot
test sample(s) for test within the time or times specified, or if
the Contracting Officer disapproves any production lot test
sample(s), the Contractor shall be deemed to have failed to
make delivery within the meaning of the Default clause of
this contract. Therefore, this contract may be subject to
termination for default. Failure of the Government in such an
event to terminate this contract for default shall not relieve



                               15
              the contractor of the responsibility to meet the delivery
              schedule for production quantities.

                      k. In the event the Contracting Officer does not
              approve, conditionally approve, or disapprove the production
              lot test sample(s) within the time specified in paragraph g
              above, the Contracting Officer shall equitably adjust the
              delivery or performance dates, or the contract price, or both,
              and any other contractual provision affected by such delay in
              accordance with the procedures provided in the Changes
              clause. Failure to agree to any adjustment shall be a dispute
              concerning a question of the fact within the meaning of the
              clause of this contract entitled Disputes.

(R4, tab 1 at 19-20)

       8. In addition, the contract contained the Local 52.246-4528, REWORK AND
REPAIR OF NONCONFORMING MATERIAL (MA y           1994) clause. It stated:

              (a) Rework and Repair are defined as follows:

                     ( 1) Rework - The reprocessing of nonconforming
              material to make it conform completely to the drawings,
              specifications or contract requirements.

                    (2) Repair - The reprocessing of nonconforming
             material in accordance with approved written procedures and
             operations to reduce, but not completely eliminate, the
             nonconformance. The purpose of repair is to bring
             nonconforming material into a usable condition. Repair is
             distinguished from rework in that the item after repair still
             does not completely conform to all of the applicable
             drawings, specifications or contract requirements.

                    (b) Rework procedures along with the associated
             inspection procedures shall be documented by the Contractor
             and submitted to the Government Quality Assurance
             Representative (QAR) for review prior to implementation.
             Rework procedures are subject to the QAR's disapproval.

                    (c) Repair procedures shall be documented
             by the Contractor and submitted on a Request for



                                             16
             Deviation/Waiver, DD Form 1694, to the Contracting Officer
             for review and written approval prior to implementation.

                     ( d) Whenever the Contractor submits a repair or
             rework procedure for Government review, the submission
             shall also include a description of the cause for the
             nonconformance and a description of the action taken or to be
             taken to prevent recurrence.

                    (e) The rework or repair procedure shall also contain a
             provision for reinspection which will take precedence over the
             Technical Data Package requirements and shall, in addition,
             provide the Government assurance that the reworked or
             repaired items have met reprocessing requirements.

(R4, tab 1 at21)

      9. Also, the contract included the Local 52.246-4550, CRITICAL CHARACTERISTICS
(FEB 2004) clause. It provided:

                    (a) The contractor's processes shall be designed to
             prevent the creation or occurrence of critical nonconformances.
             The contractor shall establish, document and maintain specific
             procedures, work and handling instructions and process controls
             relating to any critical characteristics.

                    (b) The contractor shall assure his critical processes
             are robust in design such that product and performance are
             relatively insensitive to design and manufacturing parameters.
             A robust design anticipates changes and problems. Robust
             processes shall be designed to yield less than one
             nonconformance in one million.

                    (c) An inspection/verification system shall be
             employed that will verify the robustness of your critical
             processes. Maximum use should be made of automated
             inspection equipment to accomplish verification of product
             quality. Mistake proofing techniques of your material
             handling and inspection systems are encouraged.

                     (d) Previous Practices/Special Characteristics. As a
             result of previous practices, the governments technical data



                                           17
may refer to Critical (not annotated with I or II) and Special
characteristics. Characteristics classified as Critical (not
annotated with a I or II) shall be subject to all requirements
herein associated with Critical (I) characteristics and level I
Critical nonconformances. Unless otherwise stated in Section
C, characteristics classified as Special shall be subject to all
requirements herein associated with Critical (II) and Level
(II) Critical nonconformances.

        ( e) Contractor Identified Critical Characteristics List
(CICCL). Not including critical characteristics defined in the
governments technical data (drawings, specifications, etc.),
the contractor shall identify and document all material,
component, subassembly and assembly characteristics whose
nonconformances may result in hazardous or unsafe
conditions for individuals using, maintaining or depending
upon the product. All additional critical characteristics
identified by the contractor shall comply with the critical
characteristic requirements of the technical data package,
supplemented herein. The contractors additional critical
characteristics shall be classified as Critical (I) or Critical (II),
and shall be reviewed and approved by the procuring activity
prior to manufacturing (Dl-SAFT-80970A). The following
definitions are provided.

Level I critical nonconformance. A nonconformance of a
critical characteristic that judgment and experience indicate
would result in hazardous or unsafe conditions for individuals
using, maintaining or depending upon the product; or a
nonconformance that judgment and experience indicate
would prevent performance of the tactical function of a
weapon system or major end item.

The following (as a minimum) are classified as Level I
critical nonconformances:

       ( 1) A nonconformance that will result in a hazardous or
unsafe condition (often referred to as a single point failure).

       (2) A nonconformance that will remove or degrade a
safety feature (such as those in a safe and arm device or
fuzing system).



                                 18
     (3) A nonconformance that will result in violation of
mandatory safety policies or standards.

Level II critical nonconformance: A nonconformance of a
critical characteristic, other than Level I. This includes the
nonconformance of a characteristic that judgment and
experience indicate may, depending upon the degree of
variance from the design requirement, the presence of other
nonconformances or procedural errors:

       ( 1) result in a hazardous or unsafe conditions [sic] for
individuals using, maintaining or depending upon the product, or

      (2) prevent performance of the tactical function of a
major end item.

       ( f) In the event that a Critical nonconformance is found
anywhere in the production process, the contractor, as part of
his quality system, shall have procedures in place to ensure:

       ( 1) The nonconformance is positively identified and
segregated so that there is no possibility of the item
inadvertently reentering the production process. This control
shall be accomplished without affecting or impairing
subsequent defect analysis.

      (2) The operation that produced the defective
component or assembly and any other operations
incorporating that component or assembly are immediately
stopped.

        (3) The government is immediately notified of the
critical nonconformance (telephonically and electronic mail.)
(Dl-SAFT-80970A).

       (4) Any suspect material (material in process that may
contain the same defect) is identified, segregated and
suspended from any further processing.

       ( 5) An investigation is conducted to determine the
cause of the deficiency and required corrective actions. A



                               19
report of this investigation shall be submitted to the
government (DI-SAFT-80970A). The use of the DID report
shall not delay notification to the government.

       (6) A request to restart manufacturing or to use any
suspect material associated with the critical nonconformance is
submitted to the government (DI-SAFT-80970A). Restart of
production shall not occur until the investigations are complete
or upon authorization from the procuring contracting officer.
All objective evidence of the investigations to date shall be
available for review at the time of restart. Suspect materiel
found to be nonconforming shall not be used without
Government approval.

       (g) The contractor may develop alternative plans and
provisions relative to government or contractor identified
Critical level (I) and Critical Level (II) characteristics. The
provisions shall be submitted to the government for advanced
approval and shall address the following:

       (1) Complete explanation of potential failure mode(s)
together with supporting historical and statistical data.

       (2) Pre-established plan of action (POA) to be taken
when a critical nonconformance occurs and a description of
controls to ensure there is no possibility of the nonconforming
item inadvertently entering the production process.

       (3) Means of tracking nonconformance rate,
investigative results and corrective actions taken.

        (4) Method to immediately verify that a produced
critical nonconformance is consistent with the identified
failure mode(s) and does not exceed the historical
nonconformance rate. The contractor can resume production
without specific government approval based upon the
pre-approved alternate plans and provisions for Critical
(I) characteristics and level (I) Critical nonconformances and
Critical (II) characteristics and level (II) Critical
nonconformances.




                              20
                     (h) If a critical nonconformance is discovered during
              further processing or loading, the original manufacturer who
              introduced the critical nonconformance shall bear
              responsibility for the nonconformance.

                     (i) The Government Quality Assurance Representative
              will perform the surveillance actions necessary to ensure
              compliance with this clause.

(R4, tab 1 at 22-23)

        10. The version of the contract contained at tab 1 of the Rule 4 file contains the
full text of the CRITICAL CHARACTERISTIC clause. The document at tab 1 contains the
CO's electronic signature but is not signed by the contractor. (R4, tab 1 at 1) A virtually
identical copy of the contract appears at tab 313 of the Supplemental Rule 4 file. This
copy is manually signed by both parties and incorporates the clause by reference. (R4,
tab 313 at 1, 22) In addition, a copy of the solicitation, which was also signed by the
contractor, included the full text of the clause (R4, tab 255 at 1, 21-22).

     11. The contract also included DFARS 252.223-7007, SAFEGUARDING SENSITIVE
CONVENTIONAL ARMS, AMMUNITION, AND EXPLOSIVES (SEP 1999), which provided:

                     (a) Definition. "Arms, ammunition, and explosives
              (AA&E)," as used in this clause, means those items within
              the scope (chapter 1, paragraph B) ofDoD 5100.76-M,
              Physical Security of Sensitive Conventional Arms,
              Ammunition, and Explosives.

                     (b) The requirements ofDoD 5100.76-M apply to the
              following items of AA&E being developed, produced,
              manufactured, or purchased for the Government, or provided
              to the Contractor as Government-furnished property under
              this contract:

              NOMENCLATURE
              1390-00-877-5245

              NATIONAL STOCK NUMBER
              primer, Electric

              SENSITIVITY/CATEGORY
                    IV



                                            21
                      (c) The Contractor shall comply with the requirements
               ofDoD 5100.76-M, as specified in the statement of work.
               The edition ofDoD 5100.76-M in effect on the date of
               issuance of the solicitation for this contract shall apply.

                     (d) The Contractor shall allow representatives of the
              Defense Security Service (DSS), and representatives of other
              appropriate offices of the Government, access at all reasonable
              times into its facilities and those of its subcontractors, for the
              purpose of performing surveys, inspections, and investigations
              necessary to review compliance with the physical security
              standards applicable to this contract.

                       (e) The Contractor shall notify the cognizant DSS
               field office of any subcontract involving AA&E within
               10 days after award of the subcontract.

                       (f) The Contractor shall ensure that the requirements
               of this clause are included in all subcontracts, at every tier

                          (1) For the development, production,
                          manufacture, or purchase of AA&E; or

                          (2) When AA&E will be provided to the
                          subcontractor as Government-furnished property.

                      (g) Nothing in this clause shall relieve the Contractor
              of its responsibility for complying with applicable Federal,
              state, and local laws, ordinances, codes, and regulations
              (including requirements for obtaining licenses and permits) in
              connection with the performance of this contract.

(R4, tab 1 at 40)

       12. The Security Statement of Work (SSW) outlined the physical security
requirements ofDoD 5100.76-M which were referenced in DFARS 252.223-7007. It
was attached to the contract as Attachment 9. It required that the "command will make a
Suitability Determination of structural adequacy on production and storage facilities used
by the contractor." It also stated that the "contractor shall implement a control system
that ensures accountability and control of storage structure locks and keys." Moreover,
the SSW required that "[d]uring periods when the production line is unattended, the



                                             22
contractor shall remove sensitive A&E [ammunition and explosives] to approved storage
areas or protect the production line." (R4, tab 1 at 46, 50-51)

        13. The contract also contained an extensive Automated Data List (ADL) which set
forth various technical requirements (R4, tab 1 at 62-76). Included was military
specification MIL-T-15119A which governed the round, seamless alloy steel tubing to be
used in the production of the primers (id. at 65). Paragraph 4.3 of the specification stated:
"A lot shall consist of homogeneous tubing produced from the same heat and the same heat
treatment" (R4, tab 2 at 93). Dr. Christopher Ramsay, appellant's expert witness, defined a
"heat lot" as "that original batch of steel that comes out of the electric arc furnace" (tr.
21194-95). His testimony was corroborated by Mr. Jerry Hahin, a U.S. Navy engineer, who
testified that a "heat lot" was "basically one steel billet that is sent through the heat treater
at a steel mill." For purposes of this contract, Mr. Hahin further distinguished a "heat lot"
from a "production lot." Here, a production lot was a lot of finished primers. He also
confirmed that the specification required that there be only one heat lot per production lot.
(Tr. 3/152-53) Paragraph 6.1 of the specification was titled "Intended use" and provided:
"The seamless alloy steel tubing covered by this specification is manufactured into primer
tubes subjected by explosive charges to high internal gas pressures of short duration."
Paragraph 3. 7 stated: "The tubing shall not break or permanently increase in diameter
more than 0.003 inch when subjected to the hydrostatic test of 4.9." The latter paragraph
described this test in some detail:

              All tubing shall be subjected to the minimum hydrostatic
              pressure specified in the contract or purchase order (see 6.2).
              The test shall be performed on tubing lengths up to 12 feet.
              The outside diameter of each test length shall be gaged in the
              same location before and after application of the specified
              pressure. Failure of the tubing to meet the requirements of
              3.7 shall be cause for rejection of the lot.

Paragraph 6.2 required that the "[p]rocurement documents," inter alia, "should specify" the
"[h]ydrostati[c] test pressure (see 4.9 and 6.3)." Paragraph 6.3 of the specification detailed
the "[h]ydrostati[c] test fiber stress" in these terms:

              It is intended that the tubes covered by this specification be
              subjected by the hydrostatic pressure test to a fiber stress no
              greater than 75,000 pounds per square inch as calculated from
              the following formula:

                                               bz   + az
                                       s=p     b2
                                                    -a 2




                                              23
                S = Fiber stress in pounds per square inch
                P =Hydrostatic test pressure in pounds per square inch
                a= Outside radius of the tube in inches
                b =Inside radius of the tube in inches.

(R4, tab 2 at 92-95)

       14. With respect to quality control, Hanley was also required to comply with
ISO 9001-2000 (R4, tab 1 at 20-21 ). However, it submitted a quality control program
pursuant to MIL-Q-9858A which Mr. Hahin found "to be adequate as a reasonable
alternative to ISO 900[1-]2000 for this contract" (tr. 3/212). 1 Paragraph 1.2 of
MIL-Q-9858A stated:

                This specification requires the establishment of a quality
                program by the contractor to assure compliance with the
                requirements of the contract. The program and procedures
                used to implement this specification shall be developed by the
                contractor. The quality program, including procedures,
                processes and product shall be documented and shall be
                subject to review by the Government Representative. The
                quality program is subject to the disapproval of the
                Government Representative whenever the contractor's
                procedures do not accomplish their objectives. The
                Government at its option, may furnish written notice of the
                acceptability of contractor's quality program.

In addition, paragraph 3 .4 of the specification provided:

                The contractor shall maintain and use any records or data
                essential to the economical and effective operation of his
                quality program. These records shall be available for review
                by the Government Representative and copies of individual
                records shall be furnished him upon request. Records are
                considered one of the principal forms of objective evidence of
                quality. The quality program shall assure that records are
                complete and reliable. Inspection and testing records shall, as
                a minimum, indicate the nature of the observations together

1
    Paragraph 1.5 ofMIL-Q-9858A stated in part: "ISO 9001 and ANSI/ASQC Q9001 are
         alternative model quality system requirements to this specification" (R4, tab 4 at 1).




                                               24
              with the number of observations made and the number and
              type of deficiencies found. Also, records for monitoring work
              performance and for inspection and testing shall indicate the
              acceptability of work or products and the action taken in
              connection with deficiencies. The quality program shall
              provide for the analysis and use of records as a basis for
              management action.

(R4, tab 4 at 112-14)

       15. Pursuant to MIL-Q-9858A, Hanley forwarded a Quality Assurance Program to
the government in January 2004. The manual was approved in March 2004. (R4, tab 316
at 1) Hanley stated the purpose of the manual in these terms:

                     The QA Program Manual is designed to assure
              adequate controls throughout all areas of contract
              performance. Hanley will insure all supplies and services
              under contract, regardless where manufactured or performed,
              shall be controlled at all points necessary for conformance to
              contractual requirements. This program will provide for the
              prevention and ready detection of discrepancies and for
              timely and positive corrective action. Hanley will document
              evidence of quality conformance and make such
              documentation available to the Government representative.
                     This program will delegate authority, responsibility,
              and accountability for decisions affecting quality in clear and
              precise manner, which assures the proper functioning of the
              quality program. By delegating, Hanley intends to promote
              prevention or early detection of quality failures to reduce
              correctives action costs.
                     Additionally, Hanley will collaborate and coordinate
              closely with DOD contract and administrative personnel to
              ensure contract compliance.

(Id. at 5)

        16. Paragraph 5.2 of the manual was entitled "PURCHASING DATA." It stated:

                     Prior to the issuance of any Hanley purchase order for
              services or materials a Hanley "Purchase Order Request"
              form will be completed defining the article or services to be
              procured. The QA Manager examines and approves all



                                            25
             purchase orders to insure that they define the articles or
             services to be procured. All Purchase Order Request [sic]
             may include the following items:

                   1) The applicable Government contract number, name
             and address of the subcontractor and the consignee.

                    2) A clear, concise description of the supplies or
             services ordered.

                    3) Specification numbers, drawing numbers and
             revisions, and process requirements.

                    4) Packaging, shipping and preservation requirements.

                    5) Classification of defects or other inspection
             requirements.

                   6) Requirements for qualification or other
             Government or contractor approval.

                   7) Provisions for direct shipment from the
             subcontractor's or vendor's plant to Government.

                    8) Contractor or Government source inspection
             requirements.

                    Document changes will be controlled by procedures
             outlined in Chapter 4, section 4.1 Drawings, Documentation
             and Changes.

(R4, tab 316 at 20) Ms. Cheryl Nielsen, the CO for the contract, testified that item 6,
"Requirements for qualification or other Government or contractor approval" required that
quality clauses relating to Acceptance and Inspection Equipment (AIE), Statistical Process
Control (SPC), and First Article Testing (FAT), would be included in purchase orders. In
addition, item 8 required that "Contractor or Government source inspection requirements"
were to be included in purchase orders as well. This alerted subcontractors that
government inspectors could be required to conduct inspections at their facilities.
(Tr. 5/13, 32-34) Ms. Nielsen's testimony was corroborated in part by paragraph 7.1 of
Hanley's manual which provided:




                                           26
                       When Government source inspection is required, under
                authorization of the Government Representative the purchase
                order shall contain the following statement:

                        "Government inspection is required prior to shipment
                from your plant. When material is ready for inspection
                notify, if practical, ten (10) days in advance, the Government
                Representative who normally services your plant."

                        When under authorization of the Government
                Representative, copies of the subcontract are to be furnished
                directly by the subcontractor to the Government
                Representative at his facility rather than through Government
                channels, the purchase order shall contain the following
                statement:

                        "On receipt of this order, promptly furnish a copy to
                the Government Representative who normally services your
                plant, or, if none, to the nearest Government Inspection
                Office in your locality. In the event the Representative or
                office cannot be located, our purchasing agent should be
                notified immediately."

                       Government inspection shall not constitute acceptance
                nor shall it in any way replace contractor inspection or
                otherwise relieve the contractor of his responsibility to
                furnish an acceptable end item.
                       All applicable purchasing documents will be provided
                to the Government Representative at the supplier's plant upon
                request.

(R4, tab 316 at 28)2 Ms. Teresa S. Johnson, the government's product quality manager,
testified that, despite the contract's various quality control provisions, Hanley failed to



2
    In addition, MIL-P-18714D, paragraph 4.1 stated: "Unless otherwise specified in the
         contract or purchase order (see 6.2), the contractor is responsible for the
         performance of all inspection requirements (examinations and tests) specified
         herein. Except as otherwise specified in the contract or purchase order, the
         contractor may use his own or any other facilities suitable for the performance of
         the inspection requirements specified herein, unless disapproved by the
         Government. The Government reserves the right to perform any of the inspections


                                              27
I
l    "push down" these requirements to its subcontractors. This resulted in various problems.
     (Tr. 4/126-27, 141-42)

            17. Pursuant to the requirements of DoD 5100.76-M (see finding 12), the
     Defense Security Service (DSS) conducted a pre-award survey "to evaluate the
     protection afforded items of AA&E [Arms, Ammunition and Explosives]." DSS
     concluded that the two buildings proposed by Hanley as manufacturing sites for the
     primers were non-compliant. They had been built to an unknown standard, did not have
     the required "high security locks and hasps on the access doors," and lacked compliant
     key and locks procedures. In addition, privately owned vehicles were parked within
     100 feet of the buildings. (R4, tab 289) 3

             18. On 9 December 2005, the CO informed Hanley that, inter alia, the deficiencies
     listed by DSS were endangering its "ability to perform this contract" (R4, tab 297). In a
     response of 20 December 2005, Hanley's president, Mr. T. Gaynor Blake, stated that
     Hanley had selected a different building within which to manufacture the primers and that
     any "deficiencies that are identified will be corrected or brought up to current
     requirements." He concluded that approval [by DSS] "will be requested upon completion
     and prior to use under this contract." (R4, tab 296) On 21 December 2005, the CO replied
     to Hanley's letter. Ms. Nielsen outlined the various inspections which DSS would have to
     conduct in order to approve use of the newly proposed building (R4, tab 298). On
     16 February 2006, Ms. Darlene Jones, DCMA's administrative contracting officer (ACO),
     informed Hanley that its new site plan could not be approved "due to lack of detailed
     information regarding the proposed loading, assembly and packaging operations being
     performed" in its proposed building. She listed seven items "that were missing or not
     clearly stated." (R4, tab 299) Later that month, DCMA personnel conducted a site visit to
     review Hanley's "facility site plan and the set-up of the Mk 45 Primer Manufacturing
     operation." DCMA concluded "that very little progress was being made towards finalizing
     the site plan on the day of the visit." It made four "observations" regarding deficiencies
     and noted that "proper installation of all production equipment could not be verified" due
     to the building's renovation not being completed. (R4, tab 300) On 8 March 2006, the
     Army informed Hanley that its proposed use of military security locks manufactured by
     H.O. Boehme, Inc., did not comply with the requirements ofDoD 5100.76-M. It noted that
     the regulation required use of high security locks. (R4, tab 306) On 17 April 2006, the
     Army informed Hanley that it had satisfactorily addressed the various deficiencies cited by
     DSS and that the Army was issuing "a favorable suitability determination" (R4, tab 302).



           set forth in this specification where such inspections are deemed necessary to
           ensure supplies and services conform to prescribed requirements." (R4, tab 3 at 5)
     3
       DSS also noted that Hanley's facility had not previously been involved with the
           requirements ofDoD 5100.76-M (R4, tab 289).
·~
                                                28
j
I
    There is no persuasive evidence demonstrating that government officials overreached in
    their efforts to require Hanley to comply with the requirements of DoD 5100. 76-M.

          19. At the hearing, Mr. Blake, Hanley's president, generally described the
    production process for the MK.45-1 primer as follows:

                    There are three subassemblies that go together at the final
                    assembly. So I'll talk about each of the subassemblies
                    separately.

                            This is the primer stock or head stock. This part gets
                    a[n] insulator pressed into here, and it's staked in. If you
                    know what staking is, it's where you take a metal punch and
                    push into the metal, and it squeezes metal and it grips the
                    insulator that goes in there. Then that insulator is drilled,
                    that's subassembly.

                           Course before you can do that, of course you have to
                    purchase the parts and they have to all go through your
                    receiving inspection.

                            This is the tube and this tube is still open. This tube is
                    made from the 12 foot length of tubing that we talked about
                    earlier.l41 And these holes are cross drilled in it. And there's
                    a counterbore on this end, smooth on the inside, it's threaded
                    on the outside and there's a groove on the inside of this end.

                           We buy that tube, it goes through receiving inspection
                    and we put the paper liner in it, which you can see showing
                    through the holes. And then we fill all these holes with
                    purple laquer [sic] and that's going to seal them against
                    moisture. Then that subassembly is set aside.

                           Well no, I'm sorry I missed this, the brass plug gets
                    pressed into there. And you can see it won't go in there
                    without a tremendous amount of a force. So that becomes
                    this subassembly then. The heart of the Mk45 gun primer is
                    the igniter. And the igniter is an assemblage of brass and



    4
        The 12 foot long tubes were eventually cut into 2-foot lengths, the size of the completed
             primers (tr. 3/100-01).


                                                    29
              plastic parts. That assembly, that parts pressed together and
              then it gets a fillet of red epoxy to seal it.

                      And then it gets slotted with a jeweler's saw. Into that
              slot we put a wire and we solder it in the left, right and the
              center. Such as there are two bridge wires on this unit.
              That's for redundancy if one of them would fail that there
              would still be another one that would do the job. That's
              assembled into this cup with a spacer and some black powder
              and it's got a closure foil on the top, and it's crimped. So that
              makes that subassembly.

                      At the final assembly then the igniter is put into the
              head stock and there's some sealant put in there. And then
              the tube is screwed onto the head stock and tightened up to a
              specified torque. And that crushes the igniter and makes a
              seal, that's the next step.

                    Then this is filled with black powder according to
             weight, which it comes up to about this full, somewhere in
             here. Then there's a paper cup pushed in and that paper cup
             then you pour varnish into here, which is going to seal around
             the edges of that cup.

                    You invert it let the excess varnish drip out, you let it
             dry. And then you put in another cup very similar to this one
             you put into the end, and seal that with varnish. Then it's
             ready for final inspection and testing.

(Tr. 1151-53) Mr. Blake also testified that it did not manufacture any of the components;
instead, it purchased all of them from various suppliers (tr. 1/53-54). Moreover, the
government was aware of this fact, as it was stated in Hanley's proposal (R4, tab 256 at 3;
tr. 1/54-55).

        20. Much of the tubing which Hanley used in the FAT and the first production lot
was purchased from Propellex, the prior contractor for the primers, and had been
purchased by Propellex from Plymouth tubing. The tubes had been prepared for storage
with oil and had been stored by Propellex in a closed warehouse for approximately a
decade. All of the tubes had been hydrostatically tested and some of them had been
drilled. (Tr. 217-8) Hanley also purchased several pieces of old production equipment
from Propellex (tr. 1171).




                                             30
      21. Regarding the production and machinery of the tubing, Mr. Blake testified:

             The tubing comes from the mill with a certification of the
             chemistry of the steel. And the heat treating and the physical
             properties of the steel. Just like you purchase anything,
             there'll be a certification on it.



                     So this tube then is 12 feet long and the first operation
             is to centerless grind it. Tubes these days are relatively
             straight and smooth but they have to be exceptionally straight
             and smooth to be able to go through the process. They go
             through what's called a Swiss machine. And if this tube had
             any bulges or irregularities in it, it would not feed properly
             through the Swiss machine.

                    So this centerless grinding operation is not required by
             the Government. It's a step that we did in order to improve
             the quality of the part.

(Tr. 1/55-56) Hanley thus expended time and energy on a process which it admitted was
not required by the contract.

       22. In December 2005, Hanley purchased additional Plymouth tubing from Gormac
(R4, tab 315). Unlike the tubing which it had purchased from Propellex, this tubing had to
undergo the entire machining process which Mr. Blake described in these terms:

             So the tubing came in and Gormac had that tubing shipped to
             their supplier, which was Banner. Banner is a very large
             machining operation in that area and their only, well I say
             only, I don't know their only business. They're known for
             their centerless grinding, that's their specialty.

                     So we bought the tubing, had it shipped to Banner for
             Gormac. Gormac had it centerless ground and then the tube
             went to Gormac where it was hydrostatically tested. It's
             tested in 12 foot lengths, in a machine with a calibrated gauge
             that gives it 18,000 PSI, to ensure that no tube fails.

                  After the hydrostatic test the part would then go to
             Gormac' s Swiss machine. And it would feed into the



                                            31
                machine. Does everybody know what a lathe is, it turns the
                metal horizontally.

                        You feed it into the machine and the machine would
                then drill the holes and put the counterbore in the end, thread
                this end and cut off this end. The part is essentially done, then
                it goes to plating which will make the diameter just a little bit
                larger. The plating does have a measurable thickness.

                        Then after inspection steps it would be, there's a cap
                that goes on the thread. I thought I had it here, but there's a
                plastic cap that goes on the thread to protect it during
                shipping and then it comes to Hanley.

(Tr. 1/57-58)

       23. Pursuant to Local 52.209-4511 which was included in the contract (finding 4),
Hanley was required to produce a first article for testing (FAT). The first article comprised
130 primers, as well as "5 EACH OF EVERY COMPONENT PART AND
SUBASSEMBLY (LESS EXPLOSIVE COMPONENTS)" (id.). Ms. Teresa S. Johnson,
the Army's product quality manager, was involved in Hanley's two FATs (tr. 4/125-26,
129). The first FAT was conducted in August 2006, and the second FAT took place in
December 2006 (R4, tab 321; tr. 5/177-78). There were several issues with respect to
Hanley's first FAT, according to Ms. Johnson. There were "some failures of the primer
tube." In addition, there were "some gauges that...were either not available or we had to go
and get them calibrated." Finally, there were parts that were "not clearly marked" (see
finding 5; tr. 4/130). With respect to the primer tubing, Ms. Johnson testified:

                I remember that I checked that part myself. I also remember
                that in the tubes, the holes has [sic] to be straight across from
                the other side and you have to put a pin through it, whatever
                gauge identified. But the primer tubes that I looked at the
                first day the pin wouldn't go through the holes.

(Tr. 4/130-31) Ms. Johnson testified further regarding Hanley's deficiencies:

                Instead of failing Hanley because we had been working
                together and trying to get through with this, we allowed
                Hanley to provide us with five original, ten was [sic] the from
                a new producer they had to identify they were going to go to a
                new producer. They gave us ten tubes and the agreement was
                they would give us ten tubes at the point of introducing the



                                               32
                  tube and all the assembly up to completion. However we
                  would allow them to keep the ballistics samples that they had
                  built up with the original and that they would use these tubes.
                  And when they got those ready, when we would come back
                  and look at it and they would not use the tubes that they had
                  already produced for production for the first first [sic] article.

    (Tr. 4/131)

          24. Ms. Johnson's testimony regarding Hanley's FAT deficiencies was
    corroborated by a letter forwarded to the contractor by the CO, Ms. Nielsen, on
    10 August 2006:

                         Reference Contract W52PlJ-05-C-0076, First Article
                  Testing (FAT) for the Electric, Primer MK45-l on 1 Aug
                  2006.

                          After reviewing the results of your FAT, there are
                  areas of concern that need to be addressed prior to the return
                  of the team for the completion of the First Article test. The
                  following comments are recommended for your use to assist
                  Hanley Industries in completing the FAT:

                         1. Request Hanley post work instructions at the site
                  where the work is to be performed.

                          2. Develop Inspection Instructions. (Gage usage,
                  number of samples, identify what characteristic is being
                  checked, and directions on how to perform the inspection,
                  etc)[.]

                       3. Ensure all characteristics are listed on data sheets.
                  Example MlOl and Ml02 are missing from PN 2847020.

                         4. Clarify CofC's.

                         5. Request Hanley position all gages that will be used
                  in production where they will he used during the process.
                  Ensure non-necessary gages are not included.


i
I
I
j
                                                  33
l
           6. Ensure correct gages are called out on the
    inspection sheets. Example PN 1275047Ml10 Hanley sheet
    calls out 3236973, contract calls out 3030939.

           7. Verify receipt of or request Gage 3030396.

           8. Obtain AIE approval for characteristics not
    inspected/listed at FAT.

           9. Submit and get approval for Gage modifications
    and additions including those for checking radius. If gages
    are modified, change drawing to reflect the modification and
    add a revision level to the drawing or a dash number to
    indicate a change. Document change in calibration system.

            10. Ensure all gages are calibrated and have a current
    sticker. Ensure calibration records are available. When
    calibrating gages, document gage dimensions being checked
    and calibration standard[.]

           11. Ensure gage identification is not duplicated for
    two or more gages. Example PN 685475 there were two
    gages #685475-1, one was incorrectly marked. Had .7489
    diam stenciled on the side.

           Reference a new supplier of the primer tube:

           12. Have available for inspection the 10+ primer tubes
    and associated data at the component level from the new
    supplier as agreed.

           13. Have available for inspection all assemblies and
    sub assemblies and associated data containing the primer tube
    as agreed.

           14. Ensure all certs are available for the new primer
    tube with emphasis on hydrostatic testing cert as agreed.

           In reference to the new supplier of the primer stock
    insulator drawing number 451563.




                                  34
                       15. Have available for inspection the primer stock
                insulator and associated data at the component level from the
                new supplier.

                       16. Have available for inspection all assemblies and
                sub assemblies and associated data containing the primer
                stock insulator.

                       17. Ensure all certs are available for the new primer
                stock insulator.

                        In lieu of failing your FAT test, the Government and
                Hanley Industries agreed that FAT Testing should be delayed
                to allow Hanley Industries additional time to correct the items
                listed above. Therefore, this delay in FAT testing is not due
                to any fault of the Government and the Government is not
                responsible for any additional costs that are derived from this
                delay. The test samples that are being sent out to NSWC,
                Dahlgren Division, for testing are at Hanley's risk. The
                Government assumes no responsibility if these samples fail
                their first article test. If the FA testing being conducted at
                Hanley Industries or NSWC, Dahlgren Division, fails for any
                reason, a new FAT test will be required at Hanley' s cost.

                       Also, Hanley Industries needs to provide this office the
                date when the Government can complete FA testing on the
                identified areas of concern.

                       Thank you for your cooperation in this matter. Please
                reply to the above comments NL T 24 August 2006.

(R4, tab 321)

        25. The references by both Ms. Wilson and Ms. Johnson to a "new supplier"
referred to the fact that the Army concluded that, during inspection of the FAT tubing, the
pin would not go through the holes because of rust. This apparently resulted from the fact
the Propellex tubes had sat in storage for approximately a decade. (Tr. 4/133-34)
Accordingly, the Army determined that Hanley should seek a new supplier for the second
iteration of the FAT. Hanley complied and purchased new tubing directly from Plymouth
(id.). These tubes passed the second iteration of the FAT in December 2006 and
accordingly, were approved for production (tr. 1196, 5/179-80; finding 22).




                                              35
         26. It was only much later that the Army surmised that Hanley used the rejected
    Propellex tubing in its production lots. Ms. Johnson, accompanied by other government
    employees, traveled to Gormac' s facilities. Their trip report stated, in part:

                    Gormac claimed that 8800 pieces were delivered to them
                    from Hanley in various states and stages. These pieces were
                    primer tubes which Gormac "reworked."
                    The delivered primer tubes were cut to length with holes
                    already cut out. Some of the pieces required cleaning and
                    additional work, however; all the pieces received machining
                    of threads. These pieces were not hydrostatically tested by
                    Gormac.

    (R4, tab 159 at 2) The only identified tubing which had been previously hydrostatically
    tested and required cleaning and rework was the lot which Hanley had purchased from
    Propellex and which had been rejected by the government in the first iteration of the FAT.
    Setting aside the fact that the Propellex tubes had been rejected, the only way Hanley
    could use the tubes in a production lot was to comply with the rework requirements of
    FAR 52.246-4528, REWORK AND REPAIR OF NONCONFORMING MATERIAL (MAY 1994).
    (Findings 8, 20, 22; tr. 4/134-35) Based upon these facts, the Board concludes that Hanley
    used the reworked and rejected tubes which it had purchased from Propellex in its
    production lots. 5

          27. Hanley did not deliver the primers comprising production lot 1 in a timely
    manner. Therefore, through a series of contractual modifications, culminating in
    modification No. P00005, the Army extended the delivery date for production lot 1 to 2
    February 2007 (R4, tab 1 at 4, tab 7 at 130, 132, tab 9 at 143, 145, tab 10 at 152).
    Modification No. P00005 provided:

                    SECTION A - SUPPLEMENTAL INFORMATION

                    1. The purpose of this modification is the following:

                          a. Extend the contract Delivery Schedule as depicted
                          in Section B of this modification.

                          b. Increase the contract progress payment limitation
                          for allowable contract incurred costs.



    5
        There is no record evidence demonstrating that Hanley complied with the rework clause
             with respect to the Propellex tubing (findings 8, 24).


                                                 36

j
                  2. The Delivery Schedule is hereby revised IAW the
                  Contractors [sic] proposed delivery schedule dated
                  November 7, 2006, which is incorporated into Section B of
                  this contract.

                  3. Clause HS6002, FAR 52.242-4506 Progress Payment
                  Limitation Incurred Costs, for the limitation of the Progress
                  Payment percentage for incurred allowable costs is changed
                  from I 0% to 20%.

                 4. As consideration for this extension/progress payment
                 percentage increase, the contractor offer [sic] to extend the
                 period of performance for exercising the evaluated option for
                 Fiscal year 2006 by 6 months. This extended FY06 option
                 period is from September 29, 2006 to March 28, 2007 and the
                 unit price for FY06 Evaluated Option remains as initially
                 quoted in the basic contract.

                 5. In consideration for this extension/progress payment
                 percentage increase agreed to herein as complete equitable
                 adjustment for these contract adjustments, the contractor
                 hereby releases the Government from any and all liability
                 under this contract for further equitable adjustments
                 attributable to such facts or circumstances giving rise to those
                 contract adjustments.

                 6. All other terms and conditions of this contract remain
                 unchanged and in effect.

    (/d.at151)

            28. Through Modification No. P00005, the Army, in return for consideration from
    Hanley, increased the progress payment percentage (R4, tab I 0). An issue later arose as to
    whether the CO had stopped progress payments. In an email forwarded to the Army on
    26 September 2007, Mr. Blake went so as far to state: "Cheryl [Nielsen] had previously
    stopped our progress pay." He went on to write: "I CANNOT OVEREMPHASIZE THE
    IMPORTANCE OF THIS MATTER." (Ex. A-13 at 1) However, Ms. Nielsen testified
    that she had never stopped Hanley's progress payments. In addition, she stated: "I
    wouldn't say that it's a stopping of progress payments like they were due to get a progress
    payment, as much as it was [sic] they weren't showing progress to get a payment"
    (tr. 5/137-39). Based upon the number of modifications to this contract which extended
    delivery dates, the Board concludes that whatever problems Hanley allegedly encountered



                                                37

J
in receiving progress payments on this contract resulted from its own inability to make
progress rather them from any unilateral actions on the Army's part.

        29. On 30 April 2007, the Army executed bilateral Modification No. P00006
which extended the delivery date for production lot 1 for a fourth time to 12 October 2007
and also extended the delivery date for production lot 2 to 12 January 2008 (R4, tab 11 at
158). 6 In addition, it exercised the options for periods two and three (id. at 157). Also, the
modification incorporated three letters by reference which approved the FAT, and
conditionally approved both Hanley's SPC plan and its AIE. Finally, it incorporated
various requests for deviation (RFDs) and automated data list (ADL) into the basic
contract (id.).

        30. On 2 August 2007, the Army executed Modification No. P00007 which
extended the delivery date for production lot 1 to 11 November 2007 and the delivery date
for production lot 2 to 11February2008 (R4, tab 12 at 189, 191). Because of various
problems with production lot 1, it was not accepted by the government until January 2008
(tr. 2/8-9).

      31. On 19 November 2007, Mr. Larry Harris, the Defense Contract Management
Agency (DCMA) quality assurance representative (QAR) forwarded to Hanley Corrective
Action Request (CAR) 0076-002, which stated:

                1) Reference: MIL-P-18714 D, Paragraph 4.7.1
                "Radiographic". The primer shall be subjected to a
                radiographic inspection in accordance with MIL-STD-453.
                The primer shall be mounted in the VERTICAL position with
                the primer stock up ...

                It has come to our attention that Hanley Industries
                radiographed the primers of Lot 001 in a HORIZONTAL
                position.

                2) Reference: MIL-STD-41 OE-Para 4.2 "Personnel"
                Paragraph 4.2. Personnel Qualification and Paragraph 5,
                Detailed Requirements. Paragraph 5 .1.3 Level II individuals
                shall have the skills and knowledge to set up and calibrate
                equipment, conduct tests ... evaluate and document results in
                accordance with procedures approved by the appropriate
                Level III...

6
    The original delivery date for production Lot 2, as set forth in the contract, was
         26 November 2006 (R4, tab 1 at 4).


                                                38
                Hanley Industries does not have X-Ray personnel qualified to
                Level II.

                Please address all of the questions, A thru E, in the block
                above. [Ellipses in original]

(R4, tab 278) One of the purposes of the X-ray procedure referenced in the CAR was the
assessment of black powder levels. Accordingly, the CO wrote the following letter to
Hanley on 30 November 2007:

                         In conjunction with Corrective Action Request
                0076-002 it has been determined that Lot l is now suspect of
                having low black powder weights. As a result, prior to
                Government acceptance of this lot, Hanley will need to l 00%
                x-ray the lot to determine sufficient black powder is present
                in each primer at no additional cost to the Government. An
                x-ray and measurement of the black powder column height
                can provide objective evidence that the primers have the
                correct amount of black powder. Any primers that show a
                discrepant amount of black powder present must be removed
                from the lot. If Hanley choses [sic] not to conduct the x-ray
                screening proposed above, the Government will not accept
                the lot.

                       In order to complete this effort, Hanley is required to
                submit an X-ray screening procedure to be reviewed
                and approved by the Government. Enclosed are
                suggested procedures for reference to help Hanley formulate
                the x-ray screening procedures. The procedures are only
                suggestions and it is Hanley's responsibility to formulate new
                work plans and submit screening procedures to include
                timeline to finish screening process to the Government for
                approval.

                     Request screening procedure to be submitted to the
                Government no later than 4 December 2007.

(R4, tab 279)

          32. On 29 November 2007, Mr. Harris rejected lot l through another CAR. He
stated:



                                              39
                 Deficiencies: Out of tolerance powder charge weights.

                 1) Reference: Drawing 2434755, Characteristic M107, class
                 2 black powder charge shall be 50.5-53.1 grams

                Hanley Industries Variable Control Charts sample
                measurements of Lot 001 indicate that there are four primers
                in Lot 001 with low weights (50.2, 50.2, 50.1, 50.1).

                Additionally, there is one measurement in Hanley's records
                that has been recorded over "white-out" and another
                recording that was originally recorded as 53.3 and then
                "marked over" to show 51.3. There are no explanations in
                your official records to indicate why those recordings were
                changed.

                Major Characteristics are to be accepted on 1 and rejected on
                2 nonconpliances.

                Lot 001 is rejected.

(R4, tab 281) As of 26 December 2007, Mr. Hahin, the Navy's project engineer, did not
consider this issue to be closed (R4, tab 284).

        33. On 19 January 2008, Hanley forwarded an RFD to the government in which
it requested approval to add Roberts Automatic Products, Inc., as a vendor for the primer
stock. 7 On 22 January 2008, Mr. Hahin responded as follows:

                This RFD will be considered, however, I wan [sic] to remind
                Hanley that each lot of primers is to be homogeneous in
                accordance with MIL-P-18714, paragraph 4.5 .1. Therefore,
                this deviation will only be considered if this new primer stock
                manufacturer is used for the entire lot 2 quantity.

(R4, tab 21 at 246-48) In another letter of that date, Mr. Hahin informed Hanley that its
RFD was not acceptable in its current form. He suggested a number of corrections. (R4,
tab 24 at 267)




7
    The primer stock was a steel part distinguishable from the tubing itself (tr. 3/155-56).


                                               40
I
           34. Prior to this time period, Hanley had also concluded that Plymouth would no
    longer be a reliable supplier of the tubes themselves because it had raised its prices.
    Accordingly, Hanley resolved to purchase tubes for future production lots from another
    firm called Webco. It issued a purchase order to Webco's agent, Steel Trading Co., Inc.,
    for 164,000 linear feet of tubing on 31 May 2007 (R4, tab 328). Just as it would later do
    with respect to the primer stock, Hanley was required to seek approval of its new tubing
    vendor through the mechanism of an RFD. However, even though it placed the Webco
    tubes into production, Hanley did not make such a request (tr. 1157, 4/136, 5/27).

            35. On 28 January 2008, Mr. Harris, the QAR, issued another CAR for
    Hanley's failure "to have required SPC data from vendors for each lot of component
    parts, and not conducting in-process SPC." He added:

                 A recent inquiry about Lot-002 in-process SPC and SPC data
                 from vendors indicates a repeat of major deficiencies in
                 Hanley's SPC program. Specifically, contractor personnel
                 were not fully aware that their SPC Detailed Plan required
                 variable or attribute data (Xbar & R or P. Charts) from their
                 vendors for 15 components. In addition, Hanley was required
                 to perform in-process charting on eight component parts, and
                 the primer during manufacture.

    Mr. Harris requested that Hanley respond to the CAR by 5 February 2008. It did not
    respond in a timely fashion. (R4, tabs 52, 286; tr. 4/141; finding 6)

           36. On 1 February 2008, the CO executed unilateral Modification No. POOO 10
    which, in conjunction with Hanley's revised delivery schedule spreadsheet, established a
    new delivery date for production lot 2 of 22 April 2008 (R4, tabs 4 7, 48). Despite
    several extensions, Hanley never met this revised date (tr. 5/21).

            37. On 5 February 2008, Hanley informed the government that four primer
    tubes had failed the spin gage test (R4, tab 53; finding 5). On 6 February 2008,
    Mr. Hahin responded to an inquiry from the CO by stating that this was a critical
    failure. He also stated that "Hanley in general do [sic] not seem to grasp the
    seriousness of critical defects." (R4, tab 56) Later that day, the CO forward an email
    to Hanley in which she stated:

                 This failure is considered a critical failure in accordance with
                 the terms of your contract. As such, Hanley shall follow the
                 requirements of the Critical Characteristics Clause of the
                 contract. Hanley must cease production from the point of
                 failure. Hanley shall investigate the cause of the failure and



                                                41
               prepare a failure analysis and corrective action for
               Government review and approval. Upon Government
               approval of the failure analysis and corrective action, the
               Government will provide Hanley approval to restart
               production in writing.

(R4, tab 57) Correspondence between the government's engineers demonstrated
that the gage failure was related to Hanky's SPC deficiencies. In an email of
4 February 2008, Mr. Wuorinen, the government's product quality manager, stated:

               Mr. Harris said that the vendor's lot of primer stock will
               probably be rejected for failure of the inner threads to accept
               the go gage. The present CAR did cite failure to have the
               suppliers provide SPC charts with each shipment. SPC would
               have detected this attribute defect, and if managed as
               required, corrective actions implemented to immediately
               address the probable cause (s) to prevent further defective
               product.

(R4, tab 51)

       38. On 6 February 2006, representatives of the government and Hanley met to
discuss a variety of contractual issues. Hanley, inter alia, requested a two-week
extension until 20 February 2008 to submit its revised SPC plan. (R4, tab 66 at 390)

        39. On 11 February 2008, Hanley responded to the CO's email regarding the ring
gage failure. It concluded: "The source of rejection is an oversize NOGO thread ring
gage." (R4, tab 71 at 410) On 13 February 2008, Hanley proposed using certified gages
from its supplier, Gormac, so that it could proceed with production (R4, tab 75 at 442). In
response to an additional request from the government's engineers, Hanley responded that
the root cause of the failure was that the "ring gage had become worn during the
inspection process" (R4, tabs 77, 81 at 11). Further correspondence between the parties on
this issue resulted in Hanley submitting a calibration certificate for the gages (R4,
tabs 84-87).

       40. On 14 February 2008, the CO wrote to Hanley to approve a conditional restart
of production lot 2. She concluded by stating: "It should be noted that any delay to the
current contract delivery schedule as a result of the information contained/reported on the




                                             42
referenced Failure Analysis is considered to be the responsibility of Hanley Industries,
Inc." (R4, tab 94) 8

       41. As of 27 February 2008, Hanley still had not submitted either a revised SPC
plan or an updated AIE list despite several missed deadlines (R4, tabs 100, 131).

       42. On 26 February 2008, Hanley informed the government that "high pressure
testing at Gormac has caused [one] tube to rupture" (R4, tab 101). On that same day,
the government responded as follows:

                This is considered a critical per the Critical Characteristic
                clause of your contract. Therefore Hanley must complete a
                Failure Analysis and Corrective Action Report for
                Government approval before Hanley can utilize any Gormac
                tubes in their process. If the tubes that failed are of the same
                heat of steel as tubes Hanley is currently using in production,
                Hanley must immediately cease use of those tubes until
                Government approval of failure analysis and corrective action
                report.

(R4, tab 111)

       43. On 27 February 2008, the contract specialist, Ms. Crosson, requested
"Government personnel to visit Gormac on Tuesday 4 March 2008." She also requested
"participation of Hanley personnel to accompany the Government to Gormac for the visit."
(R4, tab 114) On 28 February 2008, Hanley informed the government: "Gormac is
expecting your visit. Hanley will not be sending a representative." (R4, tab 121)

      44. Despite the fact that government representatives were traveling to Gormac to
investigate the circumstances regarding the burst tube, Hanley informed the government
on 29 February 2008 that the ruptured tube was being forwarded to Hanley's shop for
evaluation (R4, tab 127). On 3 March 2008, Mr. Wuorinen forwarded the following email
to Hanley:

                Please confirm ifthat tube is at Gormac or at your plant as
                soon as possible. We should have been informed about your
                plans to ship the tube last Tuesday. Now we have six team
                members going to Gormac today who will [be] conducting an



8
    The CO also instructed Hanley "to identify the previous portion of lot 2 as a separate
         sublot" (id).


                                               43
              investigation. I was not able to participate in this visit due to
              training all week.

              If it is at your facility, I recommend that any tests conducted
              do not destroy the site of the defect. It is extremely important
              to assure that the tube is not altered to the extent that it would
              significantly impede the Government's evaluation of your
              root cause analysis.

              What tests do you plan on conducting on the tube?
              Spectrographic, atomic adsorption, scanning electron
              microsopicity (SEM), wet chemistry?

(R4, tab 133) On that same day, Hanley responded that the tube was scheduled to arrive
at its shop "this morning" (R4, tab 134). The tube was inspected on 4 March 2008, and
Hanley submitted its inspection report to the government on 5 March 2008. Hanley also
stated that it had forwarded the tube to St. Louis Testing Laboratories for "Scanning
Electron Microscope (SEM) analysis." (R4, tab 146)

       45. During their visit to Gormac's plant on 4 and 5 March 2008, governmental
representatives learned, for the first time, that Hanley "had switched its steel tube vendor
from Plymouth to WEBCO" (tr. 4/136). Although Hanley had issued a purchase order to
Webco in May 2007 and had received tubes from the new supplier in the January to
February 2008 timeframe, it never informed the government of this fact (finding 34;
tr. 3/116). Moreover, Plymouth Steel-not Webco-was the tube vendor for the first and
the second FATs which had been approved by the government (tr. 2/5, 4/135; findings
22, 25). In addition, Plymouth Steel was also the vendor for production lot 1 which had
been accepted by the government in January 2008 (tr. 2/5; finding 30).

      46. Also during their visit to Gormac on 4 and 5 March 2008, the government's
representatives discovered that Gormac was not conducting hydrostatic testing in
accordance with the contract's requirements. On 17 March 2008, the CO forwarded the
following email to Hanley:

              Your source may have assured you that the hydrostatic tester
              was used on every tube, however, the issue lies with the fact
              that Gormac is not conducting the test in accordance with
              MIL-T-15119A. According to MIL-T-15119A, the dimensional
              portion of the hydrostatic test must also be completed on 100%
              of the tubes to satisfy the requirement that there be no more than
              .003 inches of permanent deformation. Gormac has only been
              conducting the dimensional portion of the test on 1 out of every



                                             44
              10 pieces. I have attached a copy of the record they provided
              the Government team at the approved visit for the dimensional
              test. This will be explained in our response to your restart
              request.

(Finding 13; R4, tab 161 at 169) Gormac's "Hydrotest Record," which the CO attached
to her email, confirmed that it had measured only "1 pc each 10 pcs" (R4, tab 161 at
170).

       47. During their visit, the government's representatives also concluded that
Gormac was reworking tubes although Hanley had not sought permission to do so
pursuant to the contract's requirements (finding 8; tr. 41148-49). Finally, in violation of
the contract's terms, the government's engineers were unable to inspect Gormac's
hydrostatic testing machine which had been rented and returned to the vendor by Gormac
(finding 5; tr. 4/146).

       48. All of the tubes forwarded to Gormac had been subjected to centerless
grinding by another of Hanley's vendors, even though this was not a contractual
requirement (finding 21). A byproduct of this process was that the heat lot stamps
engraved on the 12-foot sections of tubing by the steel mill were erased (tr. 41145). Thus,
the government's engineers were unable to confirm that each production lot was
comprised of only one heat lot, as required by the contract (finding 13). In a situation
where there was only one tube vendor, this might not have been a problem. But here
both Plymouth and Webco had provided tubes to Hanley, and there was no way to
differentiate the various heat lots (tr. 4/162).


      49. Hanley's closure report for production lot 2 demonstrated that the problem
was even more serious than it first appeared. Hanley stated that the tubes comprising
production lot 2 contained four heat lots. (R4, tab 206 at 90) Mr. Hahin, the government
engineer, testified that his analysis of Hanley's closure report revealed that there might
even have been a fifth heat lot in production lot 2 (tr. 31163-64).

      50. The loss of traceability of the various heat lots was so severe that Dr. Ramsay,
Hanley's expert, could not discern from which of the lots the tube which burst on
26 February 2008 had originated (tr. 2/199-200). On 10 March 2008, St. Louis Testing
Laboratories forwarded their report to Hanley. They concluded:

             This analysis suggests that the subject failure condition was
             due to the presence of a lap that had split open during
             subsequent mechanical operations. The presence of cold
             working, rough textured fracture surface (with scale), and an



                                            45
               angled fracture along the exterior and interior surfaces of the
               tube supports this conclusion.

               Laps are surface defects, which appear as seams and are
               caused by the folding over of hot metal fins that are rolled
               into the metal surface. The condition can become elongated
               during subsequent forming operations.

               This analysis indicates the linear discontinuity observed on
               the exterior surface of the tube was due to mechanical
               gouging of the surface. The presence of a cold worked
               depression in the location of the discontinuity supports this
               conclusion.

(R4, tab 150 at 89)

       51. On 11 March 2008, Hanley submitted its CAR for the tube failure
(R4, tabs 154-57). It concluded that it had complied with the requirements of
MIL-T-15119A and that the tubes conformed to specifications. It requested the
CO's permission to restart production on 12 March 2008. (R4, tab 154 at 121)

         52. On 17 March 2008, Hanley wrote to the CO:

               In our recent phone call you stated that only 10% of tubes
               were hydrostatically tested by Gormac. Please check your
               source. Gormac assures us that EVERY tube is and has been
               hydrostatically tested.

(R4, tab 160) As we have found, the CO rejected this response (finding 46). 9

      53. On 19 March 2008, the DCMA QAR, Mr. Conover forwarded a CAR to
Hanley in which he set forth several deficiencies as follows:

               Contract Requirements:

                1. 150-9000-2000 Paragraph 7.4.2, Purchasing Information

               2. MIL-P-18714D, Primer, Electric, Mark 45 Mod 1,
               Paragraph 4.5.1, Lot formation. Production must consist of

9
    Obviously, Hanley's testing costs would have been lower since Gormac was testing
        only 10 percent of the tubes (tr. 41148).


                                              46
not more than 20,000 homogeneous primers plus those
required for inspection ... and only one tubing heat treat lot.

3. MIL-T-15119A, Tubing, Round, Seamless Alloy Steel,
Para 4.3, "A lot shall consist of homogeneous tubing
produced from the same heat and the same heat treatment."

4. ED-STD-183A, (invoked by MIL-T-15119A Para 3.8)

Deficiencies:

1. Hanley Industries Issued purchase order #6082 to
Gormac for the processing of Primer Tube PN 685475.
The lot formation requirements and restrictions of
MIL-P-18714D were not incorporated into the applicable
purchase order nor was the required homogeneity of the
lots maintained. There was no heat lot tracking/control at
Gormac, nor was Gormac aware that only one heat lot
was allowed per primer lot, required to maintain
homogeneous lots. Lot 002 contains 1,800 sections of
12' tubes from 2 different heat lots, 3 7 pieces from heat
lot 06N83 and 1526 from heat lot 540325. Thus,
homogeneity was not maintained as required.

Requirement: MIL-P-18714D, paragraph 4.1
Responsibility for Inspection.

Deficiency: P.O. to Banner and Gormac requires
delegation statement for Government source inspection
(GSI). Request the clause stated below be included in all
purchase orders from Hanley regarding this contract and
any other P.O. requiring GSI.

When Government inspection is required, the contractor
shall add to his purchasing document the following
statement: "Government inspection is required prior to
shipment from your plant. Upon receipt of this order,
promptly notify the Government Representative who
normally services your plant so that appropriate planning
for Government inspection can be accomplished."


                                47
             Requirements:

             1. MIL-T-15119A, Paragraph 3.7, Hydrostatic Test.
             "The tubing shall not break or permanently increase in
             diameter more than 0.003 inch when subjected to the
             hydrostatic test of 4.9."

             2. MIL-T-15119A, Paragraph 4.9, "The outside diameter
             of each test length shall be gaged in the same location
             before [and] after application of the specified pressure."


             Deficiency:

             Gormac only measured 1 out 10 ( 10%) of the tubes for an
             increase of .003 inch after the hydrostatic test instead of
             the required 100%.

             Requirements:

                   1. IS0-9000-2000 Paragraph 7.4.2, Purchasing
             Information

                    2. MIL-T-1519A, Paragraph 3.7, Hydrostatic test (Cl)

                    3. Contract W52PIJ-05-C-0076, Section E-10,
             Critical Characteristics

             Deficiency: The hydrostatic pressure test is a critical
             characteristic, inspected and tested at the subcontract
             level, and was not identified as such in the purchase order
             with Gormac. In addition, the applicable requirements of
             Section E-10 for controlling critical characteristics were
             not incorporated into the purchase order.

(R4, tab 173 at 208-09)

      54. On 19 March 2008, the CO approved a conditional restart of the primer
production. She wrote:


                                         48
       a. Hanley Industries Ruptured Tube Corrective Action
Report, dated March 11, 2008.

       b. Government visit to Gormac on March 4-5, 2008.

       On February 26, 2008, Hanley informed the
Government they experienced failure on a critical
characteristic during high pressure testing which caused
a tube to rupture at Gormac while producing Lot 2. This
occurance [sic] is classified as a critical characteristic
per MIL-T-15119A. As a result and in accordance with the
Critical Characteristics Clause, E-10, Far Clause 52.246-4550
per contract W52PIJ-05-C-0076, production was
stopped/discontinued at both Hanley and Gormac on February
26, 2008.

        The Government has completed the necessary
technical review of MK-45, Primer Tube 685475 Root Cause
and Corrective Action Report and has determined that the
report is insufficient in identifying root cause and subsequent
corrective action. Notwithstanding the deficient failure
analysis, the Government is hereby allowing Hanley to restart
production upon completion of the following conditions:

      1. Reject and segregate ALL tubes that have been
manufactured by Webco tubing - Primer tubes and Primers.

        2. Per referenced b. Gormac's current procedures
indicate that Hydrostatic Testing is being conducted on 100%
of the material. The procedure discusses using a snap gage
set to .765 to measure the tube for distortion of the O.D. after
hydro-testing per MIL-T-l 5119A, however, it fails to address
whether a measurement was taken of the tube prior to
hydro-testing in order to determine if max .003 distortion was
not exceeded. Therefore, these procedures shall be revised
and provided to the Government for approval to reflect that
beginning measurement of the tube is being recorded prior to
hydrostatic testing. Also, all Acceptance Inspection
Equipment (AIE) being utilized at Gormac shall be submitted
to the Government for review and approval.




                               49
                      3. Only material obtained from the qualified tube
              vendor that was approved at First Article (FAT) can be
              utilized in production. If Hanley wishes to submit Webco or
              any other vendor as a source of supply for tubing for
              Government approval, Hanley shall submit a request for a
              "modified" FAT to qualify a new vendor(s). Please note,
              however, that the recent rupture makes Webco a questionable
              source of tubing. Therefore, a detailed root cause analysis
              would be required in addition to FAT request in order for the
              Government to consider Webco as a qualified source.

                     4. Only tubing that is certified to MIL-T-15119A,
              TABLE I, paragraphs 3.7 and 4.9 can be utilized in
              production. Hanley's qualified tubing vendor(s) must supply
              the proper certification.

                      5. Hanley shall revise all their procedures to ensure
              that flowdown of applicable quality contractual requirements
              are included in subcontractor purchase orders. This shall be
              validated by DCMA QAR.

                     It should be noted that any delay to the current contract
              delivery schedule as a result of the critical failure is
              considered to be the responsibility of Hanley Industries, Inc.

                       As a result of this authorization to resume production,
              it is requested that Hanley provide necessary delivery
              schedule revisions to include their offer of consideration to
              the Government for any delays.

(R4, tab 169 at 195-96) The CO, Ms. Nielsen, testified that she was not required to issue
a conditional restart in this instance. She testified further "I was trying to do what I could
to help Hanley keep moving and making progress." (Tr. 5/49)

      55. On 26 March 2008, Hanley forwarded to the government a "Root Cause and
Corrective Action Report" in which it concluded:


              All the investigation, evaluation data and reports
              provided show only one 12 foot section of tubing is
              non-conforming. Whole Lot is not non-conforming[.]




                                             50
             Webco has provided the steel per AMS-T-6736 which has the
             same chemical composition as the MIL-T-1511-9A. No
             requirement for pressure testing.
                     Material is Non Destruct Tested: Electric tested to
             ASTM A450 or A1016 & applicable test method
             E309 or E426 per certification[.]
                     Gormac has 100% pressure tested the tubes prior to
             just prior [sic] to going into production (found only 1
             ruptured 12 foot section of non-conforming tube was
             removed from being placed in use).
                     Saint Louis Testing report stated embrittlement is not
             the cause of the rupture of the tube.
                     All processing at Hanley Industries has been per
             procedure.
                     All final assemblies have passed manufacturing and
             x-ray processing as deliverable product[.] Please review the
             previously submitted documentation for approval.
                     This is a also [sic] request to restart production at
             Hanley Industries[.]
                     If at all possible list Effectivity date for 3/26/08 for
             this request[.]

(R4, tab 172 at 206)

       56. On 7 April 2008, the CO informed Hanley in writing that its CAR was
insufficient and that "the entire lot of Webco tubing is considered rejected." She
indicated that the government might consider accepting the rejected lot if Hanley
successfully complied with these requirements:

                      1. Prepare a fault tree/root cause analysis of the
             critical failure and identify what has been done or will be
             done to investigate the various possible causes of the
             failure ....

                    2. Provide documentation of Traceability of all Heat
             Lots in Lot 2 ....

                    3. Provide documentation that all tubes were
             Hydrostatic tested in accordance with MIL-T-15119A and
             met all the requirements ....




                                           51
                           4. In addition to the above mentioned requirements for
                    the existing tubes, to qualify Webco as a supplier will require
                    a Modified FAT ....

                            5. Also, in order to accept the tube stock from Webco
                    in lot 2, Hanley will need to submit two Requests for
                    Deviation.

    (R4, tab 180 at 1-3) 10

            57. On 23 April 2008, Hanley stated it intended to use Webco as its tube vendor.
    The government responded that Hanley would have to qualify Webco through a full FAT.
    (R4, tab 187 at 251) Hanley never met this requirement (tr. 5/52). On 29 April 2008,
    Hanley submitted two RFDs to the government: one related to the certification of a
    different type of steel; the other sought to allow multiple heat lots of tubes in production
    lot 2 (R4, tab 192 at 266-67).

              58. On 2 June 2008, the CO forwarded a show cause notice to Hanley. She
    stated:

                            Since you have failed to perform Contract
                    W52PIJ-05-C-0076 within the time required by its terms,
                    or cure the conditions endangering performance under
                    Contract W52PIJ-05-C-0076 as described to you in the
                    Government's letter date[d] 19 March 2008, the Government
                    is considering terminating the contract under the provisions
                    for default of this contract. Pending final decision in this
                    matter, it will be necessary to determine whether your failure
                    to perform arose from causes beyond your control and
                    without fault or negligence on your part. Accordingly, you
                    are given the opportunity to present, in writing, any facts
                    bearing on the question to Ms. Cheryl Nielsen; HQ, ASC,
                    ATTN: AMSAS-ACA- M; 1 Rock Island Arsenal; Rock
                    Island, IL 61299-6500, within ten (10) days after receipt of
                    this notice. Your failure to present any excuses within this
                    time may be considered as an admission that none exist.
                    Your attention is invited to the respective rights of Hanley
                    Industries, Inc. and the Government and the liabilities that



    10
         At the hearing, the CO testified that Hanley never complied with items 2 and 3
              (tr. 5/56-57).



I
J
                                                  52
may be invoked if a decision is made to terminate for default
in accordance with clause 52.249-8, Default.

        Effective 22 April 2008 subject contract's delivery
schedule became delinquent due to a critical failure that
occurred on 26 February 2008. Hanley's inability to provide
a realistic schedule is directly tied to their inability to meet
the conditions of production restart as follows:

a.     Hydrostatic Test the primer tubes in accordance with
       TDP requirement MlL-T-15119A which requires
       measurement to be taken prior to Hydrostatic Testing.

b.     Government approval on Acceptance Inspection
       Equipment (AIE) utilized at Hanley's subcontractor
       Gonnac in accordance with FAR clause 52.245-4537,
       Acceptance Inspection Equipment (AIE) and CDRL
       A009.

c.     Government approval on a FAT plan to qualify a new
       vendor for steel tubing in accordance with CDRL
       AOlO. Only material obtained from the qualified steel
       tube vendor that was approved by First Article Testing
       (FAT) can be utilized in production. Hanley
       purchased tubes without the Government's knowledge
       from an unqualified vendor that produced the critical
       failure. Hanley failed to use steel tubing that is
       certified to MIL-T-15119A in production.

d.     Revise procurement procedures to ensure that
       flowdown of applicable quality contractual
       requirements are included in subcontractor purchase
       orders in accordance with FAR clause 52.246-4550,
       Higher-Level Contract Quality Requirement, ISO
       9001-2000.

        Any assistance given to you on this contract or any
acceptance by the Government of delinquent goods or
services will be solely for the purpose of mitigating damages,
and it is not the intention of the Government to condone any
delinquency or to waive any rights the Government has under
the contract.



                               53
                        If Hanley Industries, Inc. fails to provide any response
                satisfactory to the Government within ten (10) days of the
                date of this letter, the Government reserves the right to assert
                its rights under this contract to include terminating the
                contract for default in accordance with FAR clause 52.249-8.

(R4, tab 264)

       59. Hanley responded to the show cause notice on 14 June 2008. With respect to
"a"; the hydrostatic testing, Hanley stated:

                The government's letter of 4/7/08 address [sic] this topic is
                      paraphrased as follows:
                      Provide documentation that all tubes were Hydrostatic
                      tested in accordance with MIL-T-15119 or tube stock
                      that has not been machined will need to be Hydrostatic
                      tested and the DCMA representative to verify, and all
                      tube stock that has been processed into tubes checked
                      to insure not expanded beyond. 003 or provide
                      documentation that all tube stock and/or primer tubes
                      that the outer diameter could not have experienced a
                      permanent deformation ofgreater than . 003" [.]
                      Hanley submitted documentation in support of the
                      third option on 5/27/08. The documentation showed
                      statistically that there was less tha[ n] 1 in a million
                      possibility that a tube had swelled more than .003."
                      The use of statistics to evaluate a characteristic is well
                      understood and used extensively in quality
                      determinations by the Government. Hanley provided
                      an explanation that we thought was suitable for
                      persons with a passing understanding of statistical
                      methods. Attached is documentation and calculations
                      providing engineering evidence that the .003
                      requirement is met and tubes at Hanley Industries have
                      been measured with Government [oversight] and meet
                      the drawing requirements. Ifthere is need of a more
                      detailed explanation, we would be happy to provide it.
                      Hanley requests that the Government clarify in what
                      way the documentation was insufficient. (Reference
                      Master Restart Index Items 11-14).




                                               54
Regarding "b"; the AIE requirements, Hanley asserted:

             Hanley submitted documentation in support of the AIE
             requirement on 5/27/08. Hanley requests that the
             Government clarify in what way the documentation was
             insufficient. (Reference Master Restart Index Item 60)

As for "c"; the FAT plan to qualify Webco as a new vendor, Hanley stated in part:

             In regards the use of tubing from Plymouth, Hanley was made
             to understand the critical nature of the need. We understand
             our Navy needs top quality Mk45 gun primers immediately.
             We have governed our actions accordingly and attempted to
             get production restarted as soon as possible. Obtaining
             material from Plymouth (vendor #1) will introduce a delay of
             many weeks. Perhaps we should not have assumed that the
             Government wanted quick delivery. Please note that all the
             tubing needed for Lot 3 has already been produced by Webco,
             and that production can begin immediately when the
             Government is satisfied with the provided documentation.

             Hanley did purchase tubing from a vendor that had not been
             prequalified by the Government, and we apologize for that.
             This, however, in no way was related to the critical failure.
             The process for qualifying a new vendor requires the
             examination of 5 tubes with QAR oversight. The tubes, had
             they been submitted in advance of use on Lot 2, would have
             passed. In fact, we could have presented 10,000 tubes to the
             QAR, and each would have passed. Please note that the
             vendor for Lot 1, Plymouth, is not immune to having tubes
             burst. Hanley has interviewed the retired Government QAR
             who had oversight at Propellex when the previous
             Mk45s were manufactured. He confirms that there was
             an occasional tube burst, and that burst tubes were discarded,
             with production continuing. In addition please note that
             Plymouth Tube declines to quote tubing to MIL-T-[15119A].
             In addition, it is our understanding that the only significant
             difference between the AMS-T-6736A specification and the
             MIL-T-[ 15119A] specification is the Hydrostatic testing.
             With the accomplishment of the Hydrotest, MIL-T-[15119A]
             requirements have been met.




                                           55
             If the government insists, we will order tubing from
             Plymouth. The tubing will take many weeks longer to get,
             cost more, will still be subject to rare hydrostatic test
             failures and will not be certified by the manufacturer to
             MIL-T-15119A. Hanley requests clear direction on this
             question, as the government's requirement for prompt
             delivery seems to be at odds with the Governments [sic]
             desire to use Plymouth tubing, without achieving any
             demonstrated improvement in quality.

             Hanley submitted documentation in support of the Webco
             FAT requirement on 5/27/08. Hanley requests that the
             Government clarify in what way the documentation was
             insufficient. (Reference Master Restart Index Items 14-16)

With respect to "d"; Revising procurement procedure to reflect flowdown of applicable
quality requirements, Hanley asserted:

             Procurement procedures have been revised and submitted to
             the Government QAR. Hanley requests that the Government
             clarify in what way the documentation was insufficient.

             Concerning the reference to the delivery schedule, Hanley has
             pointed out a critical issue that must be resolved. Since a heat
             lot of tubing may extend over several lots of Primers, and the
             failure of one tube calls into question the entire heat lot, does
             the government intend that every tube for the entire contract
             be Hydrostatically tested before machining begins on any
             tube? Otherwise a burst tube in Lot 8 could reject Lot 4 from
             a year earlier. When the tube burst issue first came up, I
             asked why not just throw the bad tube away and continue
             production. The answer was that a burst tube could indicate
             hydrogen embrittlement that could affect the entire heat. We
             promptly sent samples to St. Louis Test Labs where the
             definitive answer was given that there was no hydrogen
             embrittlement. In response to further government questions,
             further metallurgical testing was conducted. The test results
             concluded that the failure was an anomaly. This information
             was submitted to the government 5/5/08, and is apparently
             still under review.




                                            56
                 In consultations with Webco we have educated ourselves
                 about the methods of Non Destructive Testing (NOT) suitable
                 for tubing. There are two types, Eddy Current and Ultrasonic,
                 neither [of] which is a requirement of the contract. Eddy
                 Current is suitable for finding flaws of some types, but not of
                 the type that was encountered in Lot 2. Ultrasonic is suited
                 for the type of flaw that was encountered; however it cannot
                 be used on such a small tube as we are using. Webco and
                 Hanley have developed a plan by which the tubing can be
                 ultrasonically tested before being drawn down to the final
                 diameter. This testing is available as an option from the
                 vendor, starting with Lot 4, and the government may want to
                 consider including this testing in the specification.

    In effect, Hanley provided the CO with little new information, preferring to recycle
    arguments and data which it had already forwarded to the government. (R4, tab 243)

            60. On 16 July 2008, the CO forwarded to Hanley her determination to terminate
    its contract for default. She wrote, in pertinent part:

                        Reference:

                        a. Contract No. W52P1J-05-C-0076

                      b. Letter. HQ, Army Sustainment Command, subject:
                 Show Cause letter, dated 02 June 2008.

                        c. Letter, Hanley Industries, Inc. not dated, received
                 electronically June 13, 2008 Re: Show Cause Notice;
                 Contract Number W52P1J-05-C-0076

                        d. Request for Deviation (RFD) for Primer, Electric
                 MK 45 MODI, RFD No. 0076-D-0023, dated 02 May 2008,
                 Procuring Activity Number R08U7038 entitled: Material
                 Certification Change for Lot 2 Primer Tubes (enclosure)

                         The Government has reviewed Hanley Industries, Inc.
                 response to the Government's Show Cause letter, which was
                 provided in the Hanley Industries letter in reference c. above.
                 The Government has also reviewed and considered all
                 information and matters relevant to the Show Cause. As a
                 result of this review, it is the determination of the Contracting



                                                57

j
Officer that the above referenced contract is hereby
terminated for default, pursuant to the Default Clause
52.249-8 of the contract. The reasons therefore and further
instructions in regard to the Default action are set forth below.

I. Review and Relevant Facts.

        As a result of this review, the following is the
Government's response to the assertions in referenced c.
letter. The assertions of Hanley Industries are shown in the
bold print, followed by the Government position:

       a. Primer Tubes met the .003 requirement and
measured with Government oversight and meet the
drawing requirements. Hanley Industries has not provided
objective evidence that all tubes were Hydrostatic tested in
accordance with MIL-T-15119A (OS) and met all the
requirements nor provided the Government revised work
procedures to ensure Hydrostatic Test would be performed on
new material in accordance with MIL-T-15119A. This would
include providing objective evidence that all tubes met the
expansion requirement ofMIL-T-5119A that none of the
tubes expand more than 0.003 inches after hydrostatic testing.

Hanley cites their outer diameter maximum after grinding is
0.763 +/- 0.001 and their lower specification limit after
grinding at 0.762. Contractor has not provided any objective
evidence that proves all tubes met the 0.762 limit (100%
inspection data not provided), and a maximum growth after
testing of 0.765. The snap gage at Gormac was set at 0.765.
Hanley did not test/inspect in accordance with paragraph 4.9
ofMIL-T-15119A. An unknown quantity oftubes could
have been less than 0.762; therefore, the data presented is not
acceptable. It has not been shown that tubes comply with the
0.003 requirement ofMIL-T-15l19A paragraph 3.7. Banner
provided data demonstrating conformance with the diameter
specification .763 +/- .001. This data was not taken with
approved procedures using approved AIE. To date Hanley
has not provided the Government revised work procedures to
ensure Hydrostatic Test would be performed on new material
in accordance with MIL-T-15119 A which is a condition for
restart of production.



                               58
        b. Revised Acceptance Inspection Equipment (AIE)
has been submitted for Government approval. The
Government has reviewed Hanley's AIE submission dated
May 28, 2008 and it only provided Gormac's work
instructions (procedures) and make and model of the
equipment Gormac used during the investigation of the
ruptured tube. It failed to specifically identify all equipment
used to perform and verify the hydrostatic test requirement as
specified in MIL-T-15119A, as well as provide a detailed
procedure and log sheet for this characteristic. Hanley also
failed to submit AIE approval for two hydrostatic test
machines used at Gormac.

       c. Hanley did purchase tubes from vendor that had
not been pre-qualified by the Government, however, in no
way was related to the critical failure. Government disagrees
with Hanley's assertion that changing the vendor was not
related to the critical failure. Hanley purchased tubes without
the Government's knowledge from an unqualified vendor that
produced the critical failure. The purchased steel tubing used
in production was not certified to MIL-T-l 5 l l 9A. Hanley has
not qualified Webco or any other steel supplier via the First
Article Test (FAT) process per FAR Clause 52.209-4511, First
Article Test (Government Testing).

       d. Hanley has revised procurement procedures to
ensure flowdown of applicable quality contractual
requirements. DCMA QAR issued a Level II
Corrective Action Report (CAR) 0076-006 in violation of
MIL-Q-9858, paragraph 5.2 Purchasing Data. Even though
Hanley has provided revised procedures that appear to be
adequate, to date, Hanley has not provided corrected purchase
orders for Government verification.

       e. Lot 002 can be submitted by Hanley 2 weeks
after restart approval. The Government provided Hanley
conditional restart to utilize new material. To date, Hanley
has not provided a revised delivery schedule. Hanley's
assertion that they can deliver 2 weeks after restart is
contingent upon obtaining Government approval to use
material purchased from Webco. Per letter dated April 7,



                              59
    2008, the Government stipulated the conditions that Hanley
    would need to meet in order to gain Government approval to
    use material utilized in Lot 002 from Webco as follows:

            ( 1) Prepare root cause analysis of critical failure[.]
            (2) Provide documentation of traceability of all Heat
    Lots in Lot 002[.]
            (3) Provide documentation that all tubes were
    Hydrostatic tested in accordance with contract which requires
    diametrical measurements to be taken b~fore and after
    Hydrostatic Testing.
            (4) Qualify Webco as a supplier via a modified First
    Article Test[.]
           (5) Submit Requests for Deviation to get approval for
    the steel purchased to AMS-T-6736 in lieu of contract
    requirement ofMIL-T-15119A and to allow the use of
    multiple heat lots within Lot 002 of primers.

    Hanley has failed to provide the required objective evidence
    needed to gain Government approval to use the Webco
    material for the following reasons:

            a. Hanley's corrective action report provided in
    response to the critical failure involving Webco tubing was
    insufficient in identifying root cause and subsequent
    corrective action. The root cause analysis failed to investigate
    the supplier or foundry that produced the steel billets. Hanley
    has not thoroughly evaluated the foundry processes therefore,
    root cause analysis of the non-metallic inclusion is
    incomplete. As result of this omission, Hanley has failed [to
    provide] adequate root cause and corrective action for the
    critical failure.

            b. Hanley has failed to adhere to sampling
    requirements ofMIL-T-15119A (OS); MIL-P-18714D,
    paragraph 4.5.1 Lot Formation; and MIL-Q-9858A paragraph
    3 .4 Records, as Lot 002 contains up to four known heats of
    primer tubes (two Webco heat lots and two Plymouth heat
    lots) and Hanley is unable to provide objective evidence to
    determine/distinguish the heat lots of the entire quantity of
    primer tubes in Lot 002.




                                  60

j
       c. As stated in paragraph la. above, Hanley Industries
has not provided objective evidence that all tubes were
Hydrostatic tested in accordance with MIL-T-15119A (OS)
and met all the requirements.

       d. Hanley failed to qualify Webco as a supplier.

        e. The RFD to obtain Government approval for steel
purchased to an alternative specification    (0076-D-0023Rl)
is disapproved (see enclosure) as none of the proposed
alternative specifications would meet the required mechanical
properties required. Hanley has not submitted an official
copy of the RFD to allow use of multiple heat lots to the
Government.

As a result ofHanley's continued persistence on restarting
production with Webco material, Hanley's inability to provide
a realistic schedule is directly tied to their failure to meet the
conditions of production restart and makes them incapable of
meeting their proposed delivery of 2 weeks after restart.

       Included in their response, Hanley also posed the
following question to the Government:

        "Since a heat lot of tubing may extend over several
lots of Primers and the failure of one tube calls into
question the entire heat lot, does the Government intend
that every tube for the entire contract be Hydrostatically
tested before machining begins on any tube?"

The Government does not dictate production processes. The
requirements for hydrostatic testing is [sic] provided in
MIL-T-15119A, paragraph 3.7 Hydrostatic Test Cl, (Cl
designation means that this requirement is critical defect 1
and therefore must be 100% inspected) and paragraph 4.9
Hydrostatic Test. It is Hanley's responsibility to develop the
process for meeting these specification requirements.

II. Government Termination Decision

     Based upon Hanley Industries failure to show the
Government reasonable cause not to terminate their contract



                               61
                for default, this letter is a Notice of Termination of Contract
                Number W52PIJ-05-C-0076 awarded September 29, 2005 to
                Hanley Industries, Inc., for the remaining quantity of 84,630
                MK.45 Electric Primers for a total dollar amount
                $4,327,743.76. The Government exercises its right under
                contract clause 52.249-8 Default (Fixed-Priced Supply and
                Service) of the aforementioned contract. The act of failing to
                deliver in accordance with the contract schedule, provide
                supplies that conform to the TDP, use of approved vendors,
                and to meet the criterion for quality in the subject contract
                which is a failure to meet the following provisions in Hanley
                Industries contract:

                       a. Higher Level Contract Quality Requirement
                (Government Specified) 52.246-4550 (Feb 2004)
                       b. MIL-T-15119A(OS) dated October 20, 1976
                       c. Drawings/Specifications (Government Specified)
                52.210-4501(March1988); TDP for the MK-45 Electric
                Primer, 2434755K
                       d. Statement of Work for Statistical Process Control
                (Government Specified) 52.246-4506 (Feb 1999)
                       e. First Article Test (Government Test) (Government
                Specified) 52.209-4511(May1994)
                       f. Acceptance Inspection Equipment (AIE)
                (Government Specified) 52.245-4537 (Feb 2002)
                       g. Contract Data Requirements List (CDRL) AOlO
                Test/Inspection Reports, First Article Inspection & Test,
                Identification Number DI-NDTI-80809B
                       h. MIL-P-18714D, 24 January 1994
                       i. Section B Delivery Schedule - Modification POOO 10
                       j. MIL-Q-9858A dated March 15, 2004

                Hanley Industrie' s [sic] failure to meet the criteria listed
                above violated the terms of their contract and thereby
                constitutes the default.

(R4, tab 249)

      61. This timely appeal followed.




                                                62
                                     DECISION

       The law in this area is well settled. A default termination is "a drastic sanction
which should be imposed ... only for good grounds and on solid evidence." J.D.
Hedin Construction Co. v. United States, 408 F.2d 424, 431 (Ct. Cl. 1969) (citations
omitted). Accordingly, the government bears the burden of proving that the
termination was justified. If the government establishes a prima facie case in this
regard, the burden of production-or going forward-shifts to the contractor. Lisbon
Contractors, Inc. v. United States, 828 F.2d 759, 764-65 (Fed. Cir. 1987); New Era
Contract Sales, Inc., ASBCA No. 56661 et al., 11-1BCAif34,738 at 171,022. Here,
the government has met its burden.

       Initially, the Board notes that Hanley failed to meet the delivery date of 22 April
2008 for production lot 2 which was set forth in Modification No. POOOlO (finding 36).
The government had previously extended the delivery dates for both the FAT and
production lot 1 multiple times (findings 23, 27-30). Similarly, the government had
extended, on several occasions, the delivery date for production lot 2 from 28 November
2006 to 22 April 2008 (findings 29, 30, 36).

       Although, as executed, Modification No. POOO 10 was unilateral, the revised delivery
date was contained in a spreadsheet which Hanley itself prepared and which was forwarded
to the CO for incorporation into the modification (finding 36). Because the revised
delivery date was proposed by Hanley in its spreadsheet, it was "both reasonable and
specific from the standpoint of the performance capabilities of the contractor." McDonnell
Douglas Corp. v. United States, 323 F.3d 1006, 1019 (Fed. Cir. 2003).

       The CO gave Hanley more than adequate notice of the reasons underlying the
default termination. On 19 March 2008, she approved a conditional restart of the
primer production even though she was under no contractual obligation to do so. The
CO referred to gaps in Hanley's hydrostatic testing procedures. In addition, she
stressed that Webco was not an approved tube supplier and that Hanley needed to pass a
modified FAT ifit desired to use Webco's tubes. (Finding 54) Hanley did not comply
with these requirements in its CAR of 26 March 2008 (findings 55-56). On 7 April
2008, the CO informed Hanley that its report was insufficient. She rejected the Webco
tubing, but once again, stated the prerequisite conditions for its acceptance. These
included preparing a root cause analysis of the critical tube failure, providing
documentation of traceability of all heat lots in production lot 2, and qualifying Webco
as a vendor through a modified FAT. (Finding 56) In a response of23 April 2008,
Hanley simply stated that it intended to use Webco as a tube supplier (finding 57).
On 2 June 2008, the CO replied by issuing a show cause letter in which she stated that
Hanley had failed to "cure the conditions endangering performance" under the contract.
She, once again, referred to the need for a modified FAT, government approval of



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Hanley's AIE for hydrostatic testing, the need for appropriate hydrostatic testing, and
the flowdown of adequate quality requirements to subcontractors. The CO gave Hanley
10 days to cure these deficiencies. (Finding 58) On 14 June 2008, Hanley responded to
the cure notice, for the most part, by referring to information which it had previously
forwarded to the CO and which she had already deemed to be inadequate (finding 59).
Accordingly, the CO acted reasonably in terminating the contract for default on 16 July
2008 (finding 60).

        Hanley makes a host of arguments designed to show that the default was improper.
Initially, we simply note that its repeated references to other contracts performed either
by itself or by other contractors are misguided. Testimony regarding other contracts is
simply irrelevant to the issues of contractual performance raised by the termination of
this contract.

       The Board also disagrees with Hanley' s contention that the CO acted
unreasonably by declining to accept Webco as an alternate vendor (app. br. at 59-63).
Hanley never complied with the reasonable steps set forth by the CO to qualify Webco.
Further, the CO was acting responsibly when she demanded strict compliance with
contractual specifications. Mission Valve and Pump Co., ASBCA Nos. 13552, 13821,
69-2 BCA iJ 8010 at 37,243.

       We also reject Hanley's belated argument that its difficulties were the result of the
government's defective technical data package (app. br. at 65). This issue was not raised
during contractual performance. The Board also notes that Hanley successfully
completed production of the FAT and lot 1, using the package at issue.

       Hanley's argument that the CO acted in bad faith is also unfounded (app. br. at
66-68). As we have concluded, the CO acted reasonably in defaulting the contract after
Hanley failed to cure it deficiencies. Further, the record contains no evidence of bias
against Hanley by any government official. See Am-Pro Protective Agency, Inc. v.
United States, 281F.3d1234, 1240 (Fed. Cir. 2002).

       We have carefully reviewed Hanley's other contentions and reject them.




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                                  CONCLUSION

       The appeal is denied.

       Dated: 12 August 2014




                                                MICHAEL T. PAUL
                                                Administrative Judge
                                                Armed Services Board
                                                of Contract Appeals



I concur                                        I concur




~~~Apd --
Administrative Judge                            Administrative Judge
Acting Chairman                                 Vice Chairman
Armed Services Board                            Armed Services Board
of Contract Appeals                             of Contract Appeals



       I certify that the foregoing is a true copy of the Opinion and Decision of the
Armed Services Board of Contract Appeals in ASBCA No. 56584, Appeal of Hanley
Industries, Inc., rendered in conformance with the Board's Charter.

      Dated:



                                                JEFFREY D. GARDIN
                                                Recorder, Armed Services
                                                Board of Contract Appeals




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