Contract analysis

I. EXECUTIVE SUMMARY The purpose of this memorandum is to analyze the range of potential outcomes that may result when Administrative Contracting Officer ("ACO") Lt. Col. Sandra M. Vickers issues the Contracting Officer's Final Decision ("COFD") under Prime Contract No. FA8620-19-C-0337 (the "Prime Contract") and to assess the implications of each such outcome for WAL's declaratory judgment action and for Hargrove-Da

II. BACKGROUND A. The Underlying Government Contract and Cost-Overrun Dispute The dispute at issue arises out of the Advanced Tactical Airframe Program ("ATAP"), a major defense acquisition program under Prime Contract No. FA8620-19-C-0337, awarded by the United States Air Force, Air Force Life Cycle Management Center ("AFLCMC"), headquartered at Wright-Patterson Air Force Base, Ohio. The Prime Contract was awarded t

1. Titanium raw-material cost escalation — approximately $4,200,000, attributed to significant increases in the market price of aerospace-grade titanium during the 2020–2022 period, which exceeded the pricing assumptions embedded in WAL's original cost estimates.

2. Rework due to non-conforming machining tolerances — approximately $5,100,000, attributed to a pattern of out-of-tolerance conditions in WAL's precision machining of titanium structural components, necessitating rework, scrap, and remanufacturing.

3. Schedule delays causing idle-labor charges — approximately $2,300,000, attributed to delays in WAL's delivery schedule that resulted in idle labor at HDDS's final assembly facility.

4. Engineering change proposal ("ECP") implementation costs — approximately $1,200,000, attributed to the costs of implementing engineering changes directed during the course of performance. These four categories sum to approximately $12,800,000, consistent with the $12,817,441 total attributed to WP-4 in the COPD. Following the issuance of the COPD, HDDS filed a formal response and request for a COFD with DCMA on Oc

Section 11.4 (Indemnification). Section 11.4 provides that the Team Member (WAL) shall indemnify and hold harmless the Team Lead (HDDS) from and against all losses, damages, liabilities, costs, and expenses (collectively, "Losses") arising out of: (a) the Team Member's negligent acts or omissions, willful misconduct, or material breach of the Teaming Agreement; or (b) any claim by the U.S. Government that costs incur

Section 11.5 (Limitation of Liability). WAL's aggregate liability under the Teaming Agreement is capped at 120% of WAL's Work Package value. Based on WAL's $74,160,000 share of the target cost, this cap equals $88,992,000. While this cap is not at issue in the current dispute — the claimed amount of $14,726,583 is well below the cap — it sets the outer boundary of WAL's potential exposure.

Section 11.6 (Attorneys' Fees). Section 11.6 provides that the prevailing party in any dispute arising out of or relating to the Teaming Agreement shall be entitled to recover its reasonable attorneys' fees and costs from the non-prevailing party. This provision is the basis for HDDS's claim for attorneys' fees in its counterclaim, but it also provides WAL with a basis for fee recovery if WAL prevails in the DJ actio

Section 18.1 (Governing Law). The Teaming Agreement is governed by the laws of the State of New York, without regard to its conflict-of-laws principles. C. Procedural Posture of the DJ Action WAL commenced the declaratory judgment action on November 28, 2022, in the United States District Court for the Southern District of New York. The complaint asserts a single count under the Declaratory Judgment Act, 28 U.S.C. §§

III. ANALYTICAL FRAMEWORK Before turning to the scenario analysis, it is useful to set forth the analytical framework governing the relationship between the COFD and the DJ action. The COFD as the Government's Definitive Administrative Determination. The COFD will constitute the government's definitive administrative determination on the cost overruns under the Prime Contract and their allocation among work packages.

1. Causation. Section 11.4(b) requires that the government's claim of cost disallowance be "caused by Team Member's acts or omissions." WAL's position is that significant components of the WP-4 overruns — including titanium raw-material cost escalation, idle-labor charges resulting from HDDS-caused delays, and ECP implementation costs directed by HDDS or the Air Force — were not caused by WAL's acts or omissions. Und

2. Overbreadth. HDDS's indemnification demand encompasses the full $14,726,583 identified in the COPD, including $1,909,142 in overruns attributable to non-WP-4 work packages. Section 11.4(b) limits WAL's indemnification obligation to costs incurred "under the Team Member's Work Package." WAL's position is that HDDS cannot recover indemnification for overruns arising outside WP-4 under any reasonable interpretation o

3. Ripeness/Triggering. WAL has maintained an alternative argument that a COPD — as a preliminary, non-final administrative determination — does not constitute a "claim" of cost disallowance within the meaning of Section 11.4(b). The issuance of the COFD may moot this argument, depending on the nature and finality of the COFD's determinations. With this framework in mind, we turn to the three principal COFD scenarios

IV. SCENARIO ANALYSIS A. Scenario 1: COFD Confirms Full $14,726,583 Allocation and Attributes WP-4 Overruns to WAL's Performance

1. Description of Scenario. Under this scenario, ACO Lt. Col. Vickers issues a COFD that confirms the COPD's findings in their entirety. Specifically, the COFD would find that: • Total cost overruns under the Prime Contract amount to $14,726,583; • Of that total, $12,817,441 (87.03%) is attributable to WP-4, and $1,909,142 (12.97%) is attributable to other work packages; • The WP-4 overruns constitute unallowable or

2. Impact on WAL's DJ Action. This is the worst-case scenario for WAL from an evidentiary standpoint. A COFD confirming the COPD's findings in full would provide HDDS with a powerful piece of evidence — the government's formal administrative determination that costs under WAL's Work Package are disallowable and that WAL's performance was the cause. HDDS's anticipated arguments. In the DJ action, HDDS would be expecte

3. Recommended Litigation Posture. Under Scenario 1, WAL should adopt the following litigation posture: First, aggressively pursue discovery on causation. The causation defense is WAL's strongest line of attack in this scenario, and its success depends on a robust factual record. Priority discovery targets include: (i) HDDS's internal engineering records, specifications, and GD&T drawings for the WP-4 components; (ii

1. Description of Scenario. Under this scenario, ACO Lt. Col. Vickers issues a COFD that finds total cost overruns at or near the $14,726,583 level identified in the COPD but modifies the allocation among work packages and/or the attribution of root causes. Specifically, the COFD under this scenario would reduce the allocation to WP-4 below the 87.03% level set forth in the COPD, or would find that certain WP-4 overr

2. Impact on WAL's DJ Action. A COFD that reduces the WP-4 allocation or reattributes certain overrun causes substantially strengthens WAL's litigation position on both the causation and quantum dimensions of the dispute. Causation. A reduced WP-4 allocation directly narrows the scope of HDDS's indemnity claim under Section 11.4(b). To the extent the COFD finds that certain WP-4 overruns were caused by factors other

3. Recommended Litigation Posture. Under Scenario 2, WAL should adopt an assertive litigation posture designed to capitalize on the COFD's favorable findings: First, move promptly to lift the stay. The COFD's issuance satisfies the condition that prompted Judge Brannigan to impose the stay — i.e., the conclusion of the DCMA administrative review. WAL should file a motion to lift the stay within 14 days of COFD issuan

1. Description of Scenario. Under this scenario, ACO Lt. Col. Vickers issues a COFD concluding that the cost overruns identified in the COPD do not constitute unallowable or unreasonable costs under the Prime Contract. Specifically, the COFD might determine that: • The identified overruns fall within the normal CPIF cost-sharing framework, with the government bearing 70% of overruns per the 70/30 share ratio and the

2. Impact on WAL's DJ Action. A COFD finding no disallowable costs is the best-case scenario for WAL and would be potentially dispositive of the DJ action. Trigger condition not satisfied. If the COFD finds no disallowable costs, the trigger condition of Section 11.4(b) is not satisfied. Section 11.4(b) requires a "claim by the U.S. Government that costs incurred under Team Member's Work Package are unallowable, unre

3. Recommended Litigation Posture. Under Scenario 3, WAL should move aggressively and decisively to terminate the litigation: First, file a motion to lift the stay within 14 days of COFD issuance. The motion should be accompanied by a copy of the COFD and a brief explaining that the administrative review has concluded with findings that are favorable to WAL and dispositive of the DJ action. Second, file a motion for

V. CROSS-CUTTING CONSIDERATIONS Regardless of which scenario materializes, several considerations will affect WAL's strategic position and require ongoing attention. A. HDDS Administrative Appeal Rights Under the Contract Disputes Act, HDDS — as the prime contractor in privity with the government — has the right to appeal an unfavorable COFD to the Armed Services Board of Contract Appeals ("ASBCA") within 90 days of

VI. CONTINGENT LITIGATION REACTIVATION STRATEGY Given the uncertainty surrounding the timing and content of the COFD, the litigation team should maintain a state of preparedness for prompt reactivation of the DJ action. This section sets forth the contingent reactivation strategy. A. Triggering Events for Reactivation The primary triggering event for reactivation is the issuance of the COFD by ACO Lt. Col. Vickers. U

1. Obtain and analyze the COFD. The full text of the COFD should be obtained promptly — either through HDDS's counsel (who will receive it directly as prime contractor) or through Ashford & Reeves LLP's government-contracts channels. The litigation team and Ashford & Reeves (Harold Reeves and Natalie Cheng) should jointly analyze the COFD's findings, including the total overrun amount, the allocation among work packa

2. Confer with opposing counsel. The litigation team should confer with HDDS's counsel — Leonard Trager and Megan Forsythe of Voss, Trager & Kendall LLP — regarding HDDS's position on the COFD, HDDS's intentions with respect to an administrative appeal, and the parties' respective positions on lifting the stay.

3. File a joint status report or motion to lift the stay. Depending on the COFD's content and the parties' positions, the appropriate filing will be either a joint status report advising the court of the COFD's issuance and the parties' proposed next steps, or a contested motion by WAL to lift the stay.

4. Update WAL's board and leadership team. The COFD outcome and its litigation implications should be communicated promptly to WAL's leadership, including: • Marcus J. Whitmore, Chief Executive Officer • Elaine Whitmore, Chief Financial Officer • Gregory Poole, General Counsel • Catherine Soo-Hyun Park, Vice President, Government Contracts & Compliance The communication should include a concise summary of the COFD's

1. Internal HDDS documents regarding WP-4 engineering specifications, including all versions of engineering drawings, GD&T callouts, and specification change notices for the wing-box substructure, center fuselage longerons, and bulkhead fittings.

2. Government-furnished equipment delivery logs, schedules, and correspondence regarding the timing and completeness of GFE deliveries to WAL.

3. ECP directives, including all correspondence between HDDS, the Air Force Contracting Officer, and WAL regarding the initiation, scope, and cost of each engineering change implemented under WP-4.

4. HDDS's internal schedule analyses, delay attribution reports, and correspondence regarding schedule performance on the ATAP program.

5. HDDS's internal cost-accounting records and analysis supporting its allocation of overruns to WP-4. Government discovery:

1. DCMA audit work papers and supporting cost analysis used in the preparation of the COPD and COFD. The availability of these documents may be subject to government privilege assertions, which will need to be addressed through appropriate procedures.

2. Correspondence between DCMA, the Air Force Contracting Officer, and HDDS regarding the cost-overrun review. Depositions:

1. William Fong, SVP Contracts & Procurement, HDDS — as the HDDS executive most knowledgeable about the indemnity demand and the cost-allocation methodology.

2. Relevant HDDS program managers responsible for the ATAP program and WP-4 oversight.

3. ACO Lt. Col. Sandra M. Vickers — to the extent permitted by government privilege considerations and applicable rules regarding the deposition of government officials. The availability of this deposition will depend on whether the government asserts privilege or objects on the grounds of the Morgan doctrine (prohibiting inquiry into the mental processes of administrative decision-makers). See United States v. Morga

1. Government-contracts accounting expert. WAL will need an expert qualified to opine on cost allowability under FAR Part 31, the mechanics of CPIF cost-sharing, and the reasonableness and accuracy of DCMA's cost-allocation methodology. This expert will be critical to challenging the COFD's findings (under Scenario 1) or reinforcing them (under Scenarios 2 and 3). The expert should have significant experience with DC

2. Damages expert. A damages expert will be needed to analyze the quantum of any indemnifiable costs and to potentially reduce the claimed amount based on a proper application of CPIF cost-sharing principles, causation analysis, and the scope limitations of Section 11.4(b). This expert may overlap with the government-contracts accounting expert or may be a separate engagement depending on the scope of the issues.

3. Manufacturing/engineering expert (contingent). If causation is disputed — particularly with respect to whether non-conforming machining tolerances were attributable to WAL's fabrication processes or to HDDS-supplied engineering specifications — WAL will need a manufacturing or aerospace engineering expert qualified to opine on precision machining processes, GD&T interpretation, and the relationship between specifi