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1019-00005 · Whitmore Aerospace LLC · Analysis

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CALDERWOOD & HARKNESS LLP 1900 K Street NW, Suite 1100 Washington, D.C. 20006

INTERNAL MEMORANDUM

December 20, 2022

TO: Priya Anand, Partner Douglas Carmichael, Partner Patrick Gallagher, Associate

FROM: Simone Laroche, Associate

RE: DCMA Administrative Review Process Under the Contract Disputes Act and Implications for the Declaratory Judgment Action — Whitmore Aerospace LLC v. Hargrove-Dalton Defense Systems, Inc., No. 1:22-cv-10147-RMB (S.D.N.Y.)

CLIENT: Whitmore Aerospace LLC

MATTER NO.: 1019-00005

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I. EXECUTIVE SUMMARY

This memorandum analyzes the Defense Contract Management Agency ("DCMA") administrative review process currently underway with respect to Prime Contract No. FA8620-19-C-0337, which governs the Advanced Tactical Airframe Program ("ATAP"). The purpose of this memorandum is to: (1) assess the expected timeline for the Contracting Officer's Final Decision ("COFD") in the administrative proceeding; (2) evaluate the implications of various COFD outcomes for the declaratory judgment action filed by our client, Whitmore Aerospace LLC ("WAL"); and (3) provide the strategic rationale for seeking a stay of the declaratory judgment action pending conclusion of the administrative proceeding.

Based on the analysis set forth below, it is my conclusion that the DCMA administrative process will likely resolve, or at a minimum substantially narrow, the factual predicate underlying the indemnity dispute between WAL and Hargrove-Dalton Defense Systems, Inc. ("HDDS"). Specifically, the Contracting Officer's Final Decision will address the core factual questions at issue — namely, whether the identified $14,726,583 in cost overruns on the ATAP program are allowable, how those overruns should be allocated among the various work packages, and what root causes drove the overruns attributed to WAL's Work Package 4 ("WP-4"). These are precisely the questions that will determine whether HDDS's indemnification demand has merit under Section 11.4 of the Teaming Agreement between the parties.

A stay of the declaratory judgment action is warranted under the primary-jurisdiction doctrine and principles of judicial economy. Such a stay would serve WAL's interests by allowing the government's administrative determination to clarify the cost-allocation and causation issues before the United States District Court for the Southern District of New York addresses the indemnification question. The stay would preserve WAL's defenses and the court's jurisdiction, reduce near-term litigation expenditures, and position WAL to leverage the COFD's findings — which we expect will be at least partially favorable — in any subsequent litigation or settlement negotiations.

As context, the declaratory judgment complaint was filed on November 28, 2022, before the Honorable Richard M. Brannigan, United States District Judge, and has been referred to Magistrate Judge Allison P. Kurtz for pretrial management. HDDS's Answer and Counterclaim is expected in mid-January 2023. We have learned through informal communications with HDDS's counsel, Leonard Trager of Voss, Trager & Kendall LLP ("VTK"), that the Answer and Counterclaim will be filed on or about January 13, 2023. The filing of a motion to stay should follow shortly thereafter, in early-to-mid February 2023, as discussed in Section VI below.

II. BACKGROUND

A. The Prime Contract and Teaming Agreement

Prime Contract No. FA8620-19-C-0337 — Advanced Tactical Airframe Program ("ATAP"). The ATAP is a United States Air Force acquisition program for the design, development, and initial low-rate production of advanced titanium-composite hybrid airframe structures for next-generation tactical aircraft. The contracting agency is the Air Force Life Cycle Management Center ("AFLCMC"), headquartered at Wright-Patterson Air Force Base, Ohio. The Program Executive Officer for the ATAP is Colonel Brian T. Matsuda, USAF.

The prime contractor under the ATAP contract is HDDS, a Delaware corporation with its headquarters located at 1100 Garrison Boulevard, Suite 2200, Bethesda, Maryland 20817. HDDS is one of the principal U.S. defense contractors specializing in advanced airframe and structural systems for military aviation platforms and has served as the prime contractor on the ATAP since the contract's inception.

The contract is structured as a cost-plus-incentive-fee ("CPIF") arrangement. The key financial parameters of the CPIF structure are as follows:

• Target Cost: $412,000,000

• Target Fee: 8% of target cost ($32,960,000)

• Ceiling Price: $470,000,000

• Share Ratio (Overruns): 70% government / 30% contractor

• Share Ratio (Underruns): 60% government / 40% contractor

The period of performance extends from September 1, 2019, through August 31, 2024 (five base years), with two one-year option periods that may extend the contract through August 31, 2026, at the government's election.

The Teaming Agreement. On June 12, 2019, HDDS (as "Team Lead") and WAL (as "Team Member") executed a Teaming Agreement governing WAL's participation in the ATAP. Under the Teaming Agreement, WAL's scope of work is designated as Work Package 4 ("WP-4"), which encompasses the fabrication and delivery of titanium structural assemblies for the advanced airframe, including wing-box substructure, center fuselage longerons, and bulkhead fittings. These are critical structural components requiring specialized titanium machining and forging capabilities — capabilities in which WAL has established itself as a leading provider within the defense-industrial base.

WAL's share of the target cost under the Teaming Agreement is 18%, equating to $74,160,000. This reflects the substantial scope and technical complexity of the WP-4 work, which involves multi-axis CNC machining of large-format titanium forgings and electron-beam welding of structural joints.

Two provisions of the Teaming Agreement are of central importance to the current dispute:

Section 11.4 — Indemnification. Section 11.4 obligates the Team Member (WAL) to indemnify the Team Lead (HDDS) for "Losses" arising out of: (a) "negligent acts or omissions, willful misconduct, or material breach by Team Member of its obligations under this Agreement"; or (b) "government claims that costs incurred under Team Member's Work Package are unallowable, unreasonable, or otherwise subject to disallowance under applicable cost principles, to the extent such claim is caused by Team Member's acts or omissions" (emphasis added). The italicized causation language in clause (b) is of particular significance, as it limits the indemnity obligation to those government claims that are attributable to WAL's own conduct rather than to factors beyond WAL's control.

Section 11.5 — Limitation of Liability. Section 11.5 caps WAL's aggregate liability under the Teaming Agreement at 120% of the WP-4 value, which equals $88,992,000. While the indemnity demand at issue ($14,726,583) falls well below this cap, the cap remains relevant as a backstop and is worth noting for purposes of any risk analysis.

The Teaming Agreement is governed by New York law (Section 18.1) and designates as the exclusive forum the United States District Court for the Southern District of New York or the Supreme Court of the State of New York, New York County (Section 18.2). Section 18.3 provides that the parties "may" — but are not required to — submit disputes to non-binding mediation prior to commencing litigation. As discussed below, the permissive nature of Section 18.3 became a point of contention during pre-litigation negotiations.

B. The DCMA Contracting Officer's Preliminary Determination (COPD)

On August 1, 2022, Administrative Contracting Officer Lt. Col. Sandra M. Vickers, USAF, assigned to DCMA Northern Virginia, issued a Contracting Officer's Preliminary Determination ("COPD") regarding cost performance on the ATAP program. The COPD is a preliminary administrative document that identifies potential cost issues and invites contractor response; it does not constitute a final disallowance or formal government claim under the Contract Disputes Act.

The COPD identified a total of $14,726,583 in cost overruns on the ATAP program to date. Of this total, the COPD allocated $12,817,441 — representing 87.03% — to WP-4, the titanium structural assemblies work package performed by WAL. The remaining $1,909,142 (12.97%) was attributed to other work packages under the ATAP contract.

The COPD identified four primary root causes for the WP-4 cost overruns:

1. Titanium Raw-Material Cost Escalation: Approximately $4,200,000 in overruns attributable to increases in the market price of titanium mill products, including Ti-6Al-4V forgings and plate stock, which experienced significant price increases during 2020–2022 due to supply-chain disruptions and increased global demand.

2. Rework Due to Non-Conforming Machining Tolerances: Approximately $5,100,000 in overruns attributable to rework required when initial machining operations on certain titanium forgings produced components that did not meet the engineering drawing tolerances specified in the technical data package.

3. Schedule Delays Causing Idle-Labor Charges: Approximately $2,300,000 in overruns attributable to idle-labor charges incurred when WAL's production workforce was idle due to schedule delays in the delivery of government-furnished equipment ("GFE") and other upstream deliverables.

4. Engineering Change Proposal ("ECP") Implementation Costs: Approximately $1,200,000 in overruns attributable to the implementation of engineering change proposals directed by HDDS during the course of performance.

These four categories total approximately $12,800,000, which is consistent with the $12,817,441 WP-4 allocation in the COPD. It is important to note, as discussed in greater detail below, that at least three of these four root-cause categories involve factors that are arguably outside WAL's control — titanium market pricing, GFE delivery delays, and HDDS-directed engineering changes — which are central to WAL's causation defense under Section 11.4(b).

C. HDDS's Response and Indemnification Demand

On September 9, 2022, approximately five weeks after the COPD was issued, HDDS sent WAL a formal indemnification demand pursuant to Section 11.4 of the Teaming Agreement. Notably, the demand sought indemnification for the full $14,726,583 in cost overruns identified in the COPD — not merely the $12,817,441 attributed to WP-4. HDDS's demand letter asserted that all cost overruns on the ATAP program were attributable to WAL's performance deficiencies and that WAL was obligated to indemnify HDDS for the entirety of the identified overruns. A copy of the demand letter is referenced at Appendix F.

Subsequently, on October 15, 2022, HDDS filed a formal response to the COPD with DCMA and requested that ACO Lt. Col. Vickers issue a Contracting Officer's Final Decision ("COFD") under the Contract Disputes Act. In its response, HDDS disputed the DCMA's cost-allocation methodology, arguing that the allocation of overruns among work packages failed to account for the interconnected nature of the work and asserting that WAL's performance on WP-4 had cascading cost effects on other work packages. HDDS's filing is referenced at Appendix G.

HDDS's position can be summarized as follows: (1) all WP-4 overruns are solely WAL's responsibility under the Teaming Agreement; (2) the non-WP-4 overruns were also caused by WAL's deficient performance, and therefore WAL should bear indemnity responsibility for the full $14,726,583; and (3) the DCMA's preliminary allocation methodology understates WAL's culpability.

D. WAL's Position and Pre-Litigation Steps

WAL disputes HDDS's indemnification demand on multiple grounds. WAL's position, as developed through our pre-litigation analysis and coordination with WAL's management team, is as follows:

First, the causation requirement of Section 11.4(b) is not satisfied. Section 11.4(b) conditions the indemnity obligation on a showing that the government's cost claim was "caused by Team Member's acts or omissions." WAL contends that the WP-4 cost overruns identified in the COPD were substantially caused by factors outside WAL's control, including: (a) titanium raw-material price escalation, which constitutes a force majeure event or, at a minimum, a market condition beyond WAL's ability to control; (b) rework required due to engineering specifications and technical data packages supplied by HDDS, which contained ambiguities and tolerancing errors that led to non-conforming machining outputs; and (c) schedule delays caused by HDDS's late delivery of GFE and other upstream inputs to WAL's production line.

Second, HDDS's demand improperly includes $1,909,142 in non-WP-4 cost overruns. These overruns relate to work packages outside WAL's scope under the Teaming Agreement, and there is no contractual basis for requiring WAL to indemnify HDDS for cost overruns on work performed by other team members or by HDDS itself.

Third, the COPD is a preliminary determination and does not constitute a formal disallowance or government "claim" within the meaning of Section 11.4(b). Until the Contracting Officer issues a COFD, the triggering condition for WAL's indemnity obligation under clause (b) has not been met.

WAL pursued good-faith efforts to resolve the dispute before filing suit. Marcus J. Whitmore, WAL's Chief Executive Officer, met with William Fong, HDDS's Senior Vice President for Contracts and Procurement, on two occasions — September 30, 2022, and October 14, 2022 — to discuss the indemnification demand and explore a negotiated resolution. Those meetings did not result in an agreement.

On October 21, 2022, WAL formally proposed mediation under Section 18.3 of the Teaming Agreement. HDDS declined the mediation proposal by letter dated October 28, 2022, taking the position that Section 18.3 is permissive ("may") rather than mandatory and that HDDS was under no obligation to submit to mediation. While we believe HDDS's reading of Section 18.3 is likely correct on its face, WAL's good-faith effort to mediate will be relevant to any future assessment of the parties' reasonableness and may influence the court's disposition of any fee-shifting arguments.

Having exhausted its pre-litigation options, WAL filed a declaratory judgment action on November 28, 2022: Whitmore Aerospace LLC v. Hargrove-Dalton Defense Systems, Inc., Case No. 1:22-cv-10147-RMB, in the United States District Court for the Southern District of New York. The case has been assigned to the Honorable Richard M. Brannigan, United States District Judge, with pretrial matters referred to the Honorable Allison P. Kurtz, United States Magistrate Judge. The complaint seeks a declaratory judgment that WAL has no indemnification obligation to HDDS under Section 11.4 of the Teaming Agreement with respect to the $14,726,583 indemnification demand, or, in the alternative, that any indemnification obligation is limited to the extent of costs that are formally disallowed by the government and demonstrated to have been caused by WAL's acts or omissions.

As noted above, we anticipate that HDDS will file its Answer and Counterclaim on or about January 13, 2023. We expect the counterclaim to seek affirmative indemnification under Section 11.4 and potentially to assert a breach-of-contract claim for WAL's alleged failure to comply with the indemnification demand.

E. Coordination with Ashford & Reeves LLP

WAL has separately retained the firm of Ashford & Reeves LLP to serve as government contracts regulatory counsel and to advise WAL on the DCMA administrative proceeding. The engagement is managed by Harold Reeves, Senior Partner, and Natalie Cheng, Associate, at Ashford & Reeves's Washington, D.C. office located at 2001 Pennsylvania Avenue NW, Suite 700, Washington, D.C. 20006. Ashford & Reeves has deep experience in defense-contract administration, DCMA audit response, and Contract Disputes Act proceedings, and its role is complementary to Calderwood & Harkness's role as litigation counsel in the declaratory judgment action.

Calderwood & Harkness is in the process of establishing a formal coordination protocol with Ashford & Reeves to ensure effective information sharing between the administrative track (monitored by Ashford & Reeves) and the litigation track (managed by Calderwood & Harkness). We anticipate finalizing and sending a joint coordination letter in early January 2023 that will establish protocols for document sharing, joint status calls, and privilege-protection procedures to ensure that communications between the two firms on behalf of WAL remain protected by the common-interest and attorney-client privileges.

I note, for purposes of the team's awareness, that my undergraduate background in aerospace engineering (B.S., Virginia Tech, 2015) positions me to assist in the technical review of DCMA audit materials, engineering specifications, and other technical documentation that may arise in connection with both the administrative proceeding and the litigation. I will coordinate with Ashford & Reeves and with WAL's engineering and compliance personnel to ensure that the technical aspects of the cost-overrun analysis are properly understood and reflected in our litigation strategy.

III. THE DCMA ADMINISTRATIVE REVIEW PROCESS UNDER THE CONTRACT DISPUTES ACT

A. Statutory and Regulatory Framework

The administrative review process through which DCMA is evaluating the ATAP cost overruns is governed by the Contract Disputes Act of 1978 ("CDA"), as amended, codified at 41 U.S.C. §§ 7101–7109. The CDA establishes the exclusive statutory framework for resolving disputes arising under or relating to government contracts, including disputes over cost allowability and allocability under cost-reimbursement contracts. The implementing regulations are found in FAR Part 33 (Disputes and Appeals) and, for Department of Defense contracts, in the corresponding DFARS provisions, including DFARS 252.233-7001 (Choice of Law — Disputes).

The CDA process, in its most general form, operates as follows: a claim is submitted to the Contracting Officer ("CO"); the CO renders a final decision on the claim; and the contractor may then appeal the CO's decision to the Armed Services Board of Contract Appeals ("ASBCA") or, alternatively, bring a de novo action in the United States Court of Federal Claims. The CDA applies to both government claims (initiated by the CO against the contractor, typically in the form of cost disallowances, withholdings, or assessments) and contractor claims (submitted by the contractor seeking additional compensation, equitable adjustment, or other relief).

In the present case, the procedural posture is somewhat nuanced. The COPD was initiated by ACO Lt. Col. Vickers, reflecting DCMA's preliminary assessment that cost overruns exist and should be addressed. HDDS, in its October 15, 2022 filing, responded to the COPD by disputing the allocation methodology and requesting that the CO issue a formal COFD. This procedural posture effectively positions the matter as a government-initiated cost-overrun determination that the prime contractor (HDDS) is contesting. While HDDS's filing could also be characterized as a contractor claim to the extent HDDS is asserting that the government's allocation methodology is flawed, the fundamental nature of the proceeding remains a government-initiated review of cost performance on the ATAP contract.

It is important to note that the CDA and its associated administrative processes apply exclusively to the prime contract relationship between HDDS and the United States government. WAL, as a subcontractor and team member under the Teaming Agreement, is not a party to the prime contract and does not have privity of contract with the government. WAL therefore does not have standing to submit claims under the CDA, nor is WAL directly subject to the CO's COFD. Nevertheless, the COFD's findings will have significant practical — and potentially persuasive — implications for the indemnity dispute between WAL and HDDS.

B. Stages of the Administrative Review

The DCMA administrative review process for a cost-overrun dispute of this nature typically proceeds through the following stages:

1. Contracting Officer's Preliminary Determination (COPD). This is the stage at which the current proceeding originated. On August 1, 2022, ACO Lt. Col. Vickers issued the COPD, which identified the $14,726,583 in total cost overruns and set forth a preliminary allocation among work packages. The COPD is not a binding determination; rather, it serves as a notice to the contractor of the government's preliminary findings and invites the contractor to respond with additional information, documentation, and argument. The COPD creates the procedural predicate for the contractor to engage with the CO before a final decision is rendered.

2. Contractor Response. On October 15, 2022, HDDS filed its formal response to the COPD. The response disputed the allocation methodology employed by DCMA and provided supporting documentation — including cost-accounting records, incurred-cost submissions, and engineering documentation — in support of HDDS's position that the cost allocation should be revised. HDDS also formally requested that the CO issue a COFD under the CDA, thereby initiating the formal decision-making process.

3. Field Audit. Following receipt of the contractor's response, DCMA typically initiates a field audit of the prime contractor's cost records. For a dispute involving subcontractor cost performance, such as the WP-4 overruns at issue here, the field audit is likely to encompass not only the prime contractor's records but also the subcontractor's cost records. DCMA auditors will review incurred-cost submissions, timekeeping and labor-distribution records, material procurement records (including titanium purchase orders and invoices), engineering documentation (including specifications, drawings, and ECP records), and any other records bearing on the allowability, allocability, and reasonableness of the incurred costs under the applicable cost principles set forth in FAR Part 31. We expect that DCMA may request access to WAL's WP-4 cost data through HDDS, as the prime contractor has a contractual obligation to provide access to subcontractor records for audit purposes.

4. Internal Legal Review. Upon completion of the field audit, the DCMA headquarters legal counsel conducts an internal legal review of the audit findings and the CO's proposed final determination. This review assesses the legal sufficiency of the proposed COFD, ensures compliance with the CDA and applicable regulations, and evaluates whether the proposed determination is adequately supported by the factual record. The internal legal review may result in revisions to the proposed COFD before it is finalized and issued.

5. Contracting Officer's Final Decision (COFD). The COFD represents the culmination of the administrative review process and constitutes the government's formal, binding (at first instance) determination on the cost-overrun dispute. The COFD is issued by the ACO and sets forth the CO's findings of fact, conclusions regarding cost allowability and allocation, and the resulting financial adjustments. The COFD triggers the contractor's CDA appeal rights: HDDS would have 90 days from receipt of the COFD to file an appeal with the Armed Services Board of Contract Appeals, or 12 months to file a claim in the United States Court of Federal Claims.

6. Potential Appeal. If HDDS or the government is dissatisfied with the COFD, either party may pursue further review. An appeal to the ASBCA involves a de novo hearing on the factual and legal issues, with testimony, documentary evidence, and briefing. An action in the Court of Federal Claims likewise involves a de novo proceeding. The appeal stage could add one to three years to the overall timeline, depending on the complexity of the issues and the forum selected.

C. Expected Timeline

Based on publicly available DCMA processing data, historical patterns in cost-overrun disputes of comparable magnitude on CPIF contracts, and the experience of Ashford & Reeves in monitoring such proceedings, the typical timeline from issuance of a COPD to issuance of a COFD for a dispute of this scale (approximately $14.7 million in total overruns on a $412 million CPIF contract) is approximately 12 to 24 months.

Applying this timeline to the facts of the present case, and considering that the COPD was issued on August 1, 2022, and the contractor's formal response was filed on October 15, 2022, we would expect the following approximate milestones:

These projections are necessarily rough estimates and could be extended depending on the complexity of the cost analysis, the volume of documentation to be reviewed, any delays in the internal legal review process, and the CO's workload and priorities. The field audit, in particular, can be time-consuming when it involves subcontractor cost records, as the auditors must coordinate with both the prime contractor and the subcontractor to obtain and review the relevant data.

It bears noting that WAL has no direct standing in the DCMA proceeding. As a subcontractor, WAL is not a party to the prime contract and cannot submit claims or responses directly to the CO. WAL's interests in the administrative proceeding are represented indirectly through its contractual relationship with HDDS — which, given the adversarial posture between the parties, is an imperfect arrangement — and are monitored by Ashford & Reeves, which is tracking the proceeding on WAL's behalf and will advise WAL on any developments that affect WAL's interests.

D. WAL's Access to and Participation in the Administrative Process

WAL's lack of privity with the government limits its ability to participate directly in the DCMA administrative review. WAL cannot submit claims, file responses, or appear before the CO in its own right. However, WAL's participation is not entirely foreclosed.

WAL may provide information and documentation to DCMA through HDDS, as the prime contractor. Under the terms of the prime contract, HDDS is obligated to provide the government with access to cost records of its subcontractors for audit purposes, and DCMA may specifically request that HDDS produce WAL's WP-4 cost data as part of the field audit. Catherine Soo-Hyun Park, Vice President of Government Contracts and Compliance at WAL, has been designated as the internal point of contact for any DCMA audit data requests related to WP-4. Ms. Park's office maintains the relevant incurred-cost data, timekeeping records, material procurement files, and engineering documentation, and is prepared to respond promptly to any requests channeled through HDDS or directly from DCMA.

WAL's facility security clearance at the SECRET level, maintained at its production facilities, and its established relationship as a known entity within the DCMA Northern Virginia contracting community, may facilitate a cooperative posture with DCMA's audit team. While WAL cannot formally participate in the administrative proceeding, a cooperative and transparent approach to data production is likely to serve WAL's interests, as it may help ensure that DCMA's cost analysis accurately reflects the circumstances that gave rise to the WP-4 overruns — including the exogenous factors (titanium price escalation, HDDS specification issues, GFE delays) that WAL contends were the true root causes.

Ashford & Reeves will monitor whether the field audit encompasses WAL's WP-4 cost records directly and will advise WAL on any data-production obligations that may arise. Ashford & Reeves will also monitor the progress of the administrative review and provide regular updates to Calderwood & Harkness for purposes of coordinating the litigation strategy.

IV. IMPLICATIONS OF POTENTIAL COFD OUTCOMES FOR THE DECLARATORY JUDGMENT ACTION

The COFD, when issued, will have significant implications for the declaratory judgment action. While the COFD is a determination in the prime-contract proceeding and is not binding on the court in the WAL-HDDS litigation, it will constitute the government's authoritative assessment of cost allowability, cost allocation, and root causation for the ATAP overruns. As such, it will be highly probative evidence on the key factual questions underlying the indemnity dispute. This section analyzes three potential COFD scenarios and their respective implications.

A. Scenario 1: COFD Confirms Full $14,726,583 Allocation, Including $12,817,441 to WP-4

Under this scenario, the Contracting Officer's Final Decision would confirm the COPD's findings and formally determine that $12,817,441 in WP-4 cost overruns are unallowable, unreasonable, or otherwise subject to disallowance under the applicable cost principles (FAR Part 31). The remaining $1,909,142 in non-WP-4 overruns would likewise be confirmed.

If this scenario materializes, HDDS's indemnity claim under Section 11.4(b) of the Teaming Agreement would gain significant factual support. A COFD formally determining that costs under WAL's Work Package are unallowable or unreasonable would arguably constitute the government "claim" required to trigger the indemnity provision. The existence of a formal government determination, issued after a comprehensive audit and legal review, would be difficult to dismiss as merely preliminary or speculative.

However, even under this worst-case scenario, WAL retains significant defenses. Section 11.4(b) does not impose strict liability; it requires that the government's cost claim be "caused by Team Member's acts or omissions." The causation element is the critical battleground. The COFD's root-cause analysis will determine whether the overruns were attributable to WAL's own conduct or to factors beyond WAL's control:

• If the COFD attributes causation to WAL — for example, by finding that the rework costs were caused by WAL's machining errors rather than by deficiencies in the HDDS-supplied engineering specifications — then WAL's litigation position weakens materially. Under such a finding, HDDS would have both the formal government determination and a causal link to WAL's conduct.

• If, on the other hand, the COFD attributes causation to factors outside WAL's control — such as HDDS-supplied specifications that were ambiguous or contained tolerancing errors, government-caused delays in GFE delivery, or market-driven titanium price escalation — then WAL's defenses under the causation element remain strong, even if the costs themselves are formally disallowed.

Importantly, regardless of the COFD's causation findings, the non-WP-4 overruns ($1,909,142) should remain outside any indemnity obligation under Section 11.4. These overruns relate to work packages outside WAL's scope, and there is no basis in the Teaming Agreement for attributing costs from other work packages to WAL's indemnity obligation. HDDS's demand for the full $14,726,583 is overbroad on its face, and the COFD should reinforce this conclusion by allocating the non-WP-4 overruns to their respective work packages.

Litigation Impact: This is the strongest scenario for HDDS and the most challenging for WAL. If the COFD confirms the COPD's allocation and attributes causation to WAL, WAL would need to focus its litigation strategy on challenging the applicability of the COFD's findings in the contract-dispute context, contesting causation through independent engineering and cost-accounting evidence, and pressing its argument that the $1,909,142 in non-WP-4 overruns are categorically excluded from any indemnity obligation. Discovery in the DJ action would need to develop evidence on the root-cause questions that the COFD's analysis may not have fully resolved, particularly regarding the role of HDDS's specifications and GFE delays.

B. Scenario 2: COFD Reduces the Amount Attributed to WP-4

Under this scenario, the COFD would revise the cost allocation downward from the COPD's preliminary figures. This could occur if DCMA's field audit determines that some of the WP-4 overruns were actually caused by HDDS-directed engineering changes, government-caused schedule delays, or other factors properly attributable to the prime contractor or the government rather than to the subcontractor. For example, the COFD might determine that the $1,200,000 in ECP implementation costs should be borne by HDDS (as the party that directed the changes) or that the $2,300,000 in idle-labor charges attributable to GFE delivery delays should be treated as an excusable delay rather than a cost for which WAL bears responsibility.

A downward revision would strengthen WAL's position in several respects:

• It would confirm that HDDS's $14,726,583 indemnity demand is overbroad, lending credibility to WAL's contention that HDDS is seeking to shift costs that are not properly WAL's responsibility.

• It would narrow the factual predicate for the Section 11.4(b) indemnity claim, reducing the dollar amount at issue and potentially eliminating entire categories of overruns from the indemnity analysis.

• It would shift the burden to HDDS to justify a reduced indemnity claim against a revised factual baseline, making it more difficult for HDDS to sustain its aggressive litigation posture.

• It would create meaningful settlement leverage for WAL. If the COFD reduces the WP-4 allocation by 30%–50%, for example, the settlement calculus changes dramatically, and HDDS may conclude that the cost and risk of pressing the full indemnity claim are not warranted.

Litigation Impact: This scenario is favorable to WAL. Depending on the magnitude of the reduction, it could provide a basis for partial summary judgment on the excess amounts — i.e., the amounts by which HDDS's demand exceeds the COFD's allocation — and could set the stage for a settlement that resolves the remaining disputed amounts on terms favorable to WAL.

C. Scenario 3: COFD Finds No Disallowable Costs or Substantially Reduces Total Overruns

Under the most favorable scenario for WAL, the COFD would determine that the identified cost overruns are allowable and allocable under the CPIF contract terms and the applicable cost principles of FAR Part 31. This could occur if DCMA's field audit concludes that the overruns were attributable to reasonable cost increases (e.g., titanium market pricing), excusable delays, or government-directed changes — in other words, factors that are inherent in the cost-reimbursement contract structure and do not give rise to a formal disallowance.

If the COFD finds no disallowable costs, the impact on the declaratory judgment action would be decisive. Section 11.4(b) of the Teaming Agreement requires a government "claim" that costs are "unallowable, unreasonable, or otherwise subject to disallowance" as a precondition for WAL's indemnity obligation. If the COFD affirmatively determines that the costs at issue are allowable, there is no triggering event under Section 11.4(b), and HDDS's indemnity claim collapses for lack of a factual predicate. HDDS's counterclaim in the DJ action would be left without the governmental determination on which it is premised.

Litigation Impact: This is the most favorable scenario for WAL. It would provide a strong basis for a dispositive motion — either summary judgment on WAL's declaratory judgment claim or dismissal of HDDS's counterclaim. Alternatively, it could prompt HDDS to voluntarily dismiss its counterclaim and reconsider its litigation posture, potentially leading to a negotiated resolution on favorable terms.

D. Impact of a COFD on the Parties' Respective Burdens in the DJ Action

Several additional points merit consideration regarding the interplay between the COFD and the DJ action:

Burdens of Proof. In the declaratory judgment action, WAL, as the plaintiff, bears the initial burden of showing entitlement to declaratory relief — i.e., that the court should exercise its discretion to declare that WAL has no indemnification obligation (or a limited one) under Section 11.4. On HDDS's anticipated counterclaim, HDDS will bear the burden of proving its affirmative indemnification claim, including the existence of a triggering event under Section 11.4(b) and the causal nexus between WAL's acts or omissions and the government's cost determination.

Probative and Preclusive Effect of the COFD. The COFD, while not binding on the court in the DJ action (which arises under New York contract law rather than the CDA), would be highly probative on the factual questions at the heart of the dispute. Courts routinely consider administrative agency determinations as persuasive evidence on factual issues within the agency's specialized competence, and the COFD's detailed cost analysis and root-cause findings would carry significant evidentiary weight. Depending on the level of factual specificity in the COFD, it might be treated as presumptively correct on certain technical cost-accounting questions, placing the burden on the opposing party to rebut the agency's findings.

The question of whether the COFD might have preclusive effect (i.e., collateral estoppel or issue preclusion) is more complex and depends on whether the findings in the COFD satisfy the requirements of the preclusion doctrine — including whether the issues were actually litigated, whether they were necessarily decided, and whether the party against whom preclusion is sought had a full and fair opportunity to contest the findings. Because WAL is not a party to the CDA proceeding and HDDS may appeal the COFD, the preclusion analysis is uncertain, but the practical persuasive impact of the COFD is likely to be substantial regardless of its formal preclusive effect.

Impact of a COFD Appeal. If HDDS appeals the COFD to the ASBCA or the Court of Federal Claims, the appeal would further delay finality but would also generate additional factual findings through a more formal adjudicative process. An ASBCA decision, for example, would include detailed findings of fact and conclusions of law that could be even more probative (and potentially preclusive) than the COFD itself. However, an appeal could add one to three years to the timeline, which would need to be factored into the stay analysis.

V. PRIMARY-JURISDICTION DOCTRINE ANALYSIS

A. Legal Standard

The primary-jurisdiction doctrine is a common-law prudential doctrine that applies where a claim pending before a court requires the resolution of issues that, under a regulatory scheme, have been placed within the special competence of an administrative body. The doctrine allows the court to stay or dismiss proceedings pending the administrative body's resolution of the relevant issues, thereby ensuring that the court has the benefit of the agency's expertise and avoiding the risk of inconsistent determinations. See Reiter v. Cooper, 507 U.S. 258, 268 (1993); Ellis v. Tribune Television Co., 443 F.3d 71, 81 (2d Cir. 2006).

It is critical to distinguish the primary-jurisdiction doctrine from the exhaustion-of-administrative-remedies doctrine. Exhaustion requires a party to pursue available administrative remedies before seeking judicial relief. Here, WAL is not a party to the CDA proceeding and has no administrative remedies to exhaust; the CDA's administrative process applies to the prime contractor (HDDS) and the government. The primary-jurisdiction doctrine, by contrast, does not depend on whether the party before the court has its own administrative remedies. Rather, it focuses on whether an agency proceeding — even one involving different parties — is addressing issues that the agency is better positioned than the court to resolve, such that a stay would serve the interests of sound judicial administration.

The Second Circuit has identified several factors relevant to the primary-jurisdiction analysis:

(1) Whether the agency determination demands the agency's specialized expertise — that is, whether the issues involve technical or regulatory matters within the agency's particular competence;

(2) Whether the issue is within the agency's jurisdiction — that is, whether the administrative body has been charged with regulatory authority over the subject matter;

(3) Whether judicial resolution might conflict with the agency's determination — that is, whether there is a risk that the court and the agency could reach inconsistent factual or legal conclusions; and

(4) Whether a stay would unduly prejudice the parties — that is, whether the delay associated with the administrative proceeding would cause significant harm to either side.

See Ellis, 443 F.3d at 82–83; Goya Foods, Inc. v. Tropicana Prods., Inc., 846 F.2d 848, 851 (2d Cir. 1988); Nat'l Commc'ns Ass'n v. Marlowe Partners LLC, 46 F.3d 220, 222–23 (2d Cir. 1995). The application of the doctrine is discretionary, and the court weighs the relevant factors in light of the particular circumstances of the case.

B. Application to This Case

Each of the four factors supports the application of the primary-jurisdiction doctrine in this case and the entry of a stay pending the COFD.

1. Specialized Expertise. DCMA and the Contracting Officer possess specialized expertise that is directly relevant to the core factual questions in this dispute. The cost-overrun analysis underlying the COPD and the forthcoming COFD involves highly technical determinations regarding cost allowability under FAR Part 31 (including the cost-accounting standards for material costs, labor costs, and engineering costs), cost allocation among work packages under a complex CPIF contract structure, and the root-cause analysis required to determine whether identified cost overruns are attributable to the contractor's performance deficiencies, government-caused factors, or external market conditions.

These are precisely the types of determinations that the CDA and FAR Part 33 entrust to the Contracting Officer — a government official with training and experience in defense-contract administration, cost accounting, and procurement regulation. The court in the DJ action, while fully competent to resolve contract-interpretation questions under New York law, would benefit significantly from the CO's expert determination on the underlying factual questions of cost allowability and causation. Requiring the court to make independent cost-accounting and root-cause findings without the benefit of the COFD would be inefficient and would risk producing results at odds with the government's own analysis.

2. Agency Jurisdiction. The CDA vests the Contracting Officer with authority to issue final decisions on disputes "relating to" government contracts. 41 U.S.C. § 7103(a)(1). The cost-overrun determination under Prime Contract No. FA8620-19-C-0337 falls squarely within the CO's jurisdiction. The proceeding that HDDS has initiated by requesting a COFD is the precise mechanism that Congress established for resolving government-contract cost disputes at first instance. While the CO's jurisdiction extends only to the prime-contract relationship (and not to the subcontract/teaming agreement dispute between WAL and HDDS), the factual issues in the administrative proceeding substantially overlap with the factual issues in the DJ action.

3. Risk of Conflicting Determinations. If the court in the DJ action were to reach factual conclusions regarding the WP-4 cost overruns before the COFD issues, there is a significant risk of inconsistent factual findings. For example, the court might determine that the $5,100,000 in rework costs was "caused by" WAL's machining errors, while the COFD might subsequently determine that the same costs were caused by deficiencies in HDDS's engineering specifications. Such an inconsistency would create confusion, undermine confidence in both proceedings, and potentially create res judicata or collateral estoppel complications if HDDS appeals the COFD to the ASBCA or Court of Federal Claims. The risk of conflicting determinations strongly weighs in favor of allowing the administrative process to proceed to conclusion before the court resolves the overlapping factual issues.

4. Prejudice. Neither party would be unduly prejudiced by a stay. The DCMA administrative review is expected to conclude within 12 to 24 months, a timeframe that, while not insignificant, is well within the range that courts have deemed acceptable for stays based on primary jurisdiction. WAL has filed its DJ action and thereby preserved its rights; a stay does not extinguish those rights or affect the court's jurisdiction. The case can be reactivated promptly upon the issuance of the COFD.

Moreover, we have received informal indications through communications with HDDS's counsel, Leonard Trager of VTK, that HDDS may not oppose a stay. This is understandable from HDDS's perspective: HDDS itself would benefit from the COFD before pressing its anticipated counterclaim, as the COFD will determine the government's formal position on cost allowability and allocation — a position that HDDS will need to address regardless of the outcome of the DJ action. If HDDS agrees to stipulate to a stay, the prejudice analysis is further reinforced.

C. Conclusion on Primary Jurisdiction

For the foregoing reasons, the primary-jurisdiction doctrine strongly supports a stay of the DJ action pending the issuance of the COFD. The DCMA's specialized expertise in cost-accounting determinations, the overlap between the administrative issues and the DJ action's factual predicate, the risk of conflicting determinations, and the absence of undue prejudice to either party all weigh in favor of a stay. The stay is consistent with principles of judicial economy and orderly administration of justice and will position the court to benefit from the COFD's findings when the DJ action resumes.

VI. STRATEGIC RATIONALE FOR SEEKING A STAY

A. Benefits to WAL

A stay of the DJ action pending the COFD offers several concrete strategic benefits to WAL:

1. Cost Savings. Active federal litigation involving discovery, depositions, expert reports, and dispositive motion practice is expensive. Based on our preliminary assessment and the engagement letter for this matter, the estimated cost of litigating the DJ action through trial is $1.8 million to $2.4 million. A stay would significantly reduce near-term litigation expenditures by deferring the most expensive phases of the case (Discovery, expert analysis, summary judgment briefing) until the COFD provides a clearer factual basis for the dispute. During the stay period, Calderwood & Harkness's costs would be limited to monitoring-level expenditures — periodic status calls, coordination with Ashford & Reeves, and preparation for the resumption of active litigation. This represents a substantial cost savings for WAL, particularly in light of the uncertainty regarding the COFD's outcome.

2. Information Asymmetry Advantage. The COFD will reveal DCMA's detailed cost analysis and root-cause findings, providing WAL with a comprehensive factual picture that would otherwise have to be developed independently at significant cost. If WAL were to proceed with active litigation now, it would need to retain forensic cost-accounting experts to conduct an independent analysis of the WP-4 overruns — essentially duplicating the analysis that DCMA is already performing. By waiting for the COFD, WAL can benefit from the government's analysis (which, importantly, is produced by a neutral agency rather than an adversarial party) and can use it to refine its litigation position, shape its expert-witness strategy, and focus its discovery on the issues that remain genuinely disputed after the COFD issues.

3. Settlement Leverage. The COFD's outcome will have a material impact on the parties' respective settlement positions. If the COFD is favorable to WAL — by reducing the WP-4 allocation (Scenario 2) or finding no disallowable costs (Scenario 3) — WAL's settlement leverage will increase substantially. A favorable COFD would undermine the factual basis for HDDS's indemnity demand and make it more difficult for HDDS to justify an aggressive litigation posture. Conversely, if the COFD is unfavorable (Scenario 1), WAL would at least have the benefit of knowing the government's position before committing additional litigation resources, allowing for a more informed assessment of whether settlement or continued litigation is the better course. In either case, the COFD provides a critical data point that will inform the parties' settlement calculus.

4. Preservation of Defenses. A stay preserves all of WAL's defenses in the DJ action. The court retains jurisdiction over the case, and WAL's complaint remains pending. The case can be reactivated promptly — within 60 days of the COFD's issuance, under the proposed stay terms — and WAL can then proceed with the full benefit of the administrative record. No statute of limitations or repose issues are implicated by a stay, as the DJ action has already been filed and the case remains on the court's docket.

B. Risks of a Stay

While the benefits of a stay are compelling, several risks should be acknowledged and monitored:

1. Delay. The most significant risk of a stay is delay. The DCMA review could take longer than the projected 12–24 months, particularly if the field audit is complex, the internal legal review is protracted, or the CO's other priorities intervene. A delay beyond the projected timeline would extend the period of uncertainty for WAL and the corresponding contingent-liability disclosure in WAL's financial statements. At present, the indemnity contingency is expected to be treated as "reasonably possible" under ASC 450 (Contingencies) in WAL's FY 2022 audited financial statements, as prepared by Pinnacle Advisory Partners LLC (engagement partner Thomas Brennan, CPA). Mr. Brennan's preliminary assessment, communicated to WAL management, is that the $14,726,583 contingent liability does not meet the "probable" threshold for accrual but warrants disclosure as "reasonably possible." The FY 2022 audit is expected to be completed by April 14, 2023, and the contingent-liability disclosure will need to be maintained in subsequent fiscal years for as long as the matter remains unresolved. While a prolonged stay does not alter the accounting treatment (the contingency would need to be disclosed regardless of whether the litigation is active or stayed), it does extend the period during which WAL's financial statements carry the disclosure.

2. Stale Evidence. Litigation delay always carries the risk that witness memories will fade and that documents or other evidence may become harder to locate over time. However, this risk is substantially mitigated by the litigation hold notice that WAL issued on November 2, 2022, which directs all relevant WAL personnel to preserve documents and electronic records relating to the ATAP program, WP-4 cost performance, and the indemnity dispute. The litigation hold covers all document custodians identified in our initial preservation analysis, including Catherine Soo-Hyun Park (VP, Government Contracts & Compliance), WAL's engineering and production management personnel, and the relevant finance and accounting staff. We will ensure that the litigation hold remains in effect throughout the stay period and will conduct periodic compliance checks. Additionally, the key factual witnesses — including Mr. Whitmore, Ms. Park, and the WAL engineering and production leads — remain employed by WAL and are available for deposition and trial testimony when the case resumes.

3. HDDS May Change Position. While we have received informal indications from VTK that HDDS may not oppose a stay, this is not guaranteed. HDDS could elect to press for active litigation on its counterclaim, either because it views early discovery as advantageous or because it wishes to maintain pressure on WAL. If HDDS opposes the stay, we would need to brief the motion on a contested basis, which would require a more developed argument on the primary-jurisdiction doctrine and a fuller evidentiary record regarding the status and expected timeline of the DCMA proceeding. We should be prepared for this contingency, and the analysis in Section V above provides the framework for the contested-motion briefing.

4. Lender and Insurer Implications. WAL has notified Ridgeline National Bank, N.A. ("Ridgeline") of the indemnity dispute and the DJ action on two occasions — September 28, 2022, and December 5, 2022 — in compliance with Section 6.07(b) of WAL's $75 million senior secured revolving credit facility (the litigation-disclosure covenant, which requires notification of any litigation or threatened litigation involving a potential liability exceeding $5 million). David Kreutz, the relationship manager at Ridgeline, has acknowledged receipt of both notices. Additionally, Meridian Surety & Insurance Group ("Meridian") issued a reservation-of-rights letter on November 1, 2022, with respect to WAL's Directors & Officers Policy (No. MSI-DO-2022-07814) and Commercial General Liability Policy (No. MSI-CGL-2021-33291). Both Ridgeline and Meridian are monitoring the matter. A prolonged stay does not resolve the contingent-liability overhang for either the lender or the insurer, but it also does not worsen the situation — the contingent liability exists regardless of whether the litigation is active or stayed, and the stay does not affect WAL's compliance with its notification obligations. We recommend continued periodic updates to Ridgeline and Meridian throughout the stay period.

C. Recommended Approach

Based on the foregoing analysis of benefits and risks, I recommend the following course of action:

1. Timing. File a motion to stay in early-to-mid February 2023, after HDDS files its expected Answer and Counterclaim (anticipated on or about January 13, 2023). Filing the motion after the answer is filed ensures that both parties' positions are framed on the docket and avoids any argument that the motion is premature.

2. Joint Stipulation. Approach VTK (Leonard Trager and Megan Forsythe, the litigation associates handling the matter for HDDS) to determine whether HDDS is willing to stipulate to a stay. A joint stipulation would significantly simplify the motion, reduce briefing costs, and increase the likelihood of a favorable ruling. Given the informal indications we have received, there is a reasonable prospect that HDDS will agree to a stipulation.

3. Proposed Terms. Propose that the stay remain in effect until 60 days after the issuance of the COFD, or until further order of the court. The 60-day period allows both parties time to review the COFD's findings and assess their implications for the DJ action before active litigation resumes.

4. Status Reporting. Propose 120-day joint status reporting intervals to keep the court informed of the progress of the DCMA administrative review and maintain the litigation posture. The joint status reports would be filed as letter briefs and would summarize the current status of the DCMA proceeding, any significant developments, and the parties' positions on whether the stay should continue.

5. Coordination with Ashford & Reeves. Continue to coordinate closely with Harold Reeves and Natalie Cheng at Ashford & Reeves to monitor the DCMA timeline and receive regular updates on the administrative proceeding. This coordination is essential to ensuring that we have timely and accurate information about the progress of the field audit, the internal legal review, and the anticipated timing of the COFD. The formal coordination protocol (discussed in Section II.E) should be finalized in early January 2023.

VII. ADDITIONAL CONSIDERATIONS

A. Impact on Insurance Coverage

Meridian's reservation-of-rights letter, dated November 1, 2022, reserves Meridian's rights to deny coverage on two principal grounds. First, Meridian reserves on the contractual-liability exclusion (Exclusion (b) of the standard CGL form), which excludes coverage for liability assumed under a contract. Meridian takes the position that WAL's potential indemnity obligation under Section 11.4 of the Teaming Agreement may constitute a contractual liability within the scope of this exclusion. Second, Meridian reserves on the government-contract exclusion (Endorsement GC-04 to the CGL Policy), which excludes coverage for claims arising out of government-contract cost disallowances.

At present, Meridian is not providing a defense to WAL in the DJ action and is not funding the litigation. This means that all litigation costs are being borne by WAL directly, which underscores the importance of cost-management strategies such as the proposed stay.

A stay of the DJ action does not prejudice WAL's coverage rights. The stay does not constitute a waiver of WAL's claims against Meridian, nor does it alter the terms or conditions of the applicable insurance policies. Indeed, the stay may ultimately benefit the coverage analysis: if the COFD clarifies the nature of the underlying claim — for example, by determining that the overruns are attributable to factors outside WAL's control rather than to WAL's contractual performance — it may undermine Meridian's reliance on the contractual-liability and government-contract exclusions.

We recommend continued follow-up with Rachel Underwood, the claims examiner at Meridian assigned to this matter, to press for a definitive coverage determination. The coverage question can and should be revisited once the COFD clarifies the nature and scope of the underlying claim, at which point WAL may be in a stronger position to obtain coverage or to challenge a denial of coverage if necessary.

B. Financial Statement and Audit Implications

As noted above, Pinnacle Advisory Partners LLC (Thomas Brennan, CPA, Engagement Partner) is expected to address the indemnity contingency in WAL's FY 2022 audited financial statements under ASC 450 (Contingencies). Based on preliminary discussions with Mr. Brennan, the expected treatment is as follows:

• The $14,726,583 indemnity demand will be disclosed in the footnotes to the financial statements as a contingent liability that is "reasonably possible" but not "probable."

• No accrual will be recorded, as the loss does not currently meet the "probable" threshold under ASC 450.

• The footnote disclosure will describe the nature of the contingency, the amount of the demand, and the status of the litigation and administrative proceedings.

A stay of the DJ action does not alter this accounting treatment. The contingent liability exists by virtue of HDDS's indemnity demand and the pending litigation, and its treatment under ASC 450 is based on the probability of loss — a determination that depends on the merits of the dispute, not on the pace of the litigation. The stay may, in fact, facilitate a more accurate probability assessment in future periods: once the COFD issues, WAL and its auditors will have a clearer basis for evaluating the likelihood of loss and determining whether the accounting treatment should be adjusted.

WAL's FY 2022 revenue of approximately $287 million and its ongoing operations are not materially disrupted by the adoption of a stay posture. The contingent liability, while significant in absolute terms, represents less than 5.2% of WAL's annual revenue and is not expected to impair WAL's financial condition or operational capacity.

C. Credit Facility Compliance

WAL maintains a $75 million senior secured revolving credit facility with Ridgeline National Bank, N.A. The credit facility is currently drawn to $31.2 million, leaving $43.8 million in available borrowing capacity. Section 6.07(b) of the cred

ATTORNEY WORK PRODUCT — PRIVILEGED AND CONFIDENTIAL THIS MEMORANDUM IS PROTECTED BY THE ATTORNEY-CLIENT PRIVILEGE AND THE WORK PRODUCT DOCTRINE. DO NOT DISTRIBUTE OUTSIDE OF THE LITIGATION TEAM WITHOUT PRIOR AUTHORIZATION.
CALDERWOOD & HARKNESS LLP 1900 K Street NW, Suite 1100 Washington, D.C. 20006
INTERNAL MEMORANDUM
December 20, 2022
TO: Priya Anand, Partner Douglas Carmichael, Partner Patrick Gallagher, Associate
FROM: Simone Laroche, Associate
RE: DCMA Administrative Review Process Under the Contract Disputes Act and Implications for the Declaratory Judgment Action — Whitmore Aerospace LLC v. Hargrove-Dalton Defense Systems, Inc., No. 1:22-cv-10147-RMB (S.D.N.Y.)
CLIENT: Whitmore Aerospace LLC
MATTER NO.: 1019-00005
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I. EXECUTIVE SUMMARY
This memorandum analyzes the Defense Contract Management Agency ("DCMA") administrative review process currently underway with respect to Prime Contract No. FA8620-19-C-0337, which governs the Advanced Tactical Airframe Program ("ATAP"). The purpose of this memorandum is to: (1) assess the expected timeline for the Contracting Officer's Final Decision ("COFD") in the administrative proceeding; (2) evaluate the implications of various COFD outcomes for the declaratory judgment action filed by our client, Whitmore Aerospace LLC ("WAL"); and (3) provide the strategic rationale for seeking a stay of the declaratory judgment action pending conclusion of the administrative proceeding.
Based on the analysis set forth below, it is my conclusion that the DCMA administrative process will likely resolve, or at a minimum substantially narrow, the factual predicate underlying the indemnity dispute between WAL and Hargrove-Dalton Defense Systems, Inc. ("HDDS"). Specifically, the Contracting Officer's Final Decision will address the core factual questions at issue — namely, whether the identified $14,726,583 in cost overruns on the ATAP program are allowable, how those overruns should be allocated among the various work packages, and what root causes drove the overruns attributed to WAL's Work Package 4 ("WP-4"). These are precisely the questions that will determine whether HDDS's indemnification demand has merit under Section 11.4 of the Teaming Agreement between the parties.
A stay of the declaratory judgment action is warranted under the primary-jurisdiction doctrine and principles of judicial economy. Such a stay would serve WAL's interests by allowing the government's administrative determination to clarify the cost-allocation and causation issues before the United States District Court for the Southern District of New York addresses the indemnification question. The stay would preserve WAL's defenses and the court's jurisdiction, reduce near-term litigation expenditures, and position WAL to leverage the COFD's findings — which we expect will be at least partially favorable — in any subsequent litigation or settlement negotiations.
As context, the declaratory judgment complaint was filed on November 28, 2022, before the Honorable Richard M. Brannigan, United States District Judge, and has been referred to Magistrate Judge Allison P. Kurtz for pretrial management. HDDS's Answer and Counterclaim is expected in mid-January 2023. We have learned through informal communications with HDDS's counsel, Leonard Trager of Voss, Trager & Kendall LLP ("VTK"), that the Answer and Counterclaim will be filed on or about January 13, 2023. The filing of a motion to stay should follow shortly thereafter, in early-to-mid February 2023, as discussed in Section VI below.
II. BACKGROUND
A. The Prime Contract and Teaming Agreement
Prime Contract No. FA8620-19-C-0337 — Advanced Tactical Airframe Program ("ATAP"). The ATAP is a United States Air Force acquisition program for the design, development, and initial low-rate production of advanced titanium-composite hybrid airframe structures for next-generation tactical aircraft. The contracting agency is the Air Force Life Cycle Management Center ("AFLCMC"), headquartered at Wright-Patterson Air Force Base, Ohio. The Program Executive Officer for the ATAP is Colonel Brian T. Matsuda, USAF.
The prime contractor under the ATAP contract is HDDS, a Delaware corporation with its headquarters located at 1100 Garrison Boulevard, Suite 2200, Bethesda, Maryland 20817. HDDS is one of the principal U.S. defense contractors specializing in advanced airframe and structural systems for military aviation platforms and has served as the prime contractor on the ATAP since the contract's inception.
The contract is structured as a cost-plus-incentive-fee ("CPIF") arrangement. The key financial parameters of the CPIF structure are as follows:
• Target Cost: $412,000,000
• Target Fee: 8% of target cost ($32,960,000)
• Ceiling Price: $470,000,000
• Share Ratio (Overruns): 70% government / 30% contractor
• Share Ratio (Underruns): 60% government / 40% contractor
The period of performance extends from September 1, 2019, through August 31, 2024 (five base years), with two one-year option periods that may extend the contract through August 31, 2026, at the government's election.
The Teaming Agreement. On June 12, 2019, HDDS (as "Team Lead") and WAL (as "Team Member") executed a Teaming Agreement governing WAL's participation in the ATAP. Under the Teaming Agreement, WAL's scope of work is designated as Work Package 4 ("WP-4"), which encompasses the fabrication and delivery of titanium structural assemblies for the advanced airframe, including wing-box substructure, center fuselage longerons, and bulkhead fittings. These are critical structural components requiring specialized titanium machining and forging capabilities — capabilities in which WAL has established itself as a leading provider within the defense-industrial base.
WAL's share of the target cost under the Teaming Agreement is 18%, equating to $74,160,000. This reflects the substantial scope and technical complexity of the WP-4 work, which involves multi-axis CNC machining of large-format titanium forgings and electron-beam welding of structural joints.
Two provisions of the Teaming Agreement are of central importance to the current dispute:
Section 11.4 — Indemnification. Section 11.4 obligates the Team Member (WAL) to indemnify the Team Lead (HDDS) for "Losses" arising out of: (a) "negligent acts or omissions, willful misconduct, or material breach by Team Member of its obligations under this Agreement"; or (b) "government claims that costs incurred under Team Member's Work Package are unallowable, unreasonable, or otherwise subject to disallowance under applicable cost principles, to the extent such claim is caused by Team Member's acts or omissions" (emphasis added). The italicized causation language in clause (b) is of particular significance, as it limits the indemnity obligation to those government claims that are attributable to WAL's own conduct rather than to factors beyond WAL's control.
Section 11.5 — Limitation of Liability. Section 11.5 caps WAL's aggregate liability under the Teaming Agreement at 120% of the WP-4 value, which equals $88,992,000. While the indemnity demand at issue ($14,726,583) falls well below this cap, the cap remains relevant as a backstop and is worth noting for purposes of any risk analysis.
The Teaming Agreement is governed by New York law (Section 18.1) and designates as the exclusive forum the United States District Court for the Southern District of New York or the Supreme Court of the State of New York, New York County (Section 18.2). Section 18.3 provides that the parties "may" — but are not required to — submit disputes to non-binding mediation prior to commencing litigation. As discussed below, the permissive nature of Section 18.3 became a point of contention during pre-litigation negotiations.
B. The DCMA Contracting Officer's Preliminary Determination (COPD)
On August 1, 2022, Administrative Contracting Officer Lt. Col. Sandra M. Vickers, USAF, assigned to DCMA Northern Virginia, issued a Contracting Officer's Preliminary Determination ("COPD") regarding cost performance on the ATAP program. The COPD is a preliminary administrative document that identifies potential cost issues and invites contractor response; it does not constitute a final disallowance or formal government claim under the Contract Disputes Act.
The COPD identified a total of $14,726,583 in cost overruns on the ATAP program to date. Of this total, the COPD allocated $12,817,441 — representing 87.03% — to WP-4, the titanium structural assemblies work package performed by WAL. The remaining $1,909,142 (12.97%) was attributed to other work packages under the ATAP contract.
The COPD identified four primary root causes for the WP-4 cost overruns:
1. Titanium Raw-Material Cost Escalation: Approximately $4,200,000 in overruns attributable to increases in the market price of titanium mill products, including Ti-6Al-4V forgings and plate stock, which experienced significant price increases during 2020–2022 due to supply-chain disruptions and increased global demand.
2. Rework Due to Non-Conforming Machining Tolerances: Approximately $5,100,000 in overruns attributable to rework required when initial machining operations on certain titanium forgings produced components that did not meet the engineering drawing tolerances specified in the technical data package.
3. Schedule Delays Causing Idle-Labor Charges: Approximately $2,300,000 in overruns attributable to idle-labor charges incurred when WAL's production workforce was idle due to schedule delays in the delivery of government-furnished equipment ("GFE") and other upstream deliverables.
4. Engineering Change Proposal ("ECP") Implementation Costs: Approximately $1,200,000 in overruns attributable to the implementation of engineering change proposals directed by HDDS during the course of performance.
These four categories total approximately $12,800,000, which is consistent with the $12,817,441 WP-4 allocation in the COPD. It is important to note, as discussed in greater detail below, that at least three of these four root-cause categories involve factors that are arguably outside WAL's control — titanium market pricing, GFE delivery delays, and HDDS-directed engineering changes — which are central to WAL's causation defense under Section 11.4(b).
C. HDDS's Response and Indemnification Demand
On September 9, 2022, approximately five weeks after the COPD was issued, HDDS sent WAL a formal indemnification demand pursuant to Section 11.4 of the Teaming Agreement. Notably, the demand sought indemnification for the full $14,726,583 in cost overruns identified in the COPD — not merely the $12,817,441 attributed to WP-4. HDDS's demand letter asserted that all cost overruns on the ATAP program were attributable to WAL's performance deficiencies and that WAL was obligated to indemnify HDDS for the entirety of the identified overruns. A copy of the demand letter is referenced at Appendix F.
Subsequently, on October 15, 2022, HDDS filed a formal response to the COPD with DCMA and requested that ACO Lt. Col. Vickers issue a Contracting Officer's Final Decision ("COFD") under the Contract Disputes Act. In its response, HDDS disputed the DCMA's cost-allocation methodology, arguing that the allocation of overruns among work packages failed to account for the interconnected nature of the work and asserting that WAL's performance on WP-4 had cascading cost effects on other work packages. HDDS's filing is referenced at Appendix G.
HDDS's position can be summarized as follows: (1) all WP-4 overruns are solely WAL's responsibility under the Teaming Agreement; (2) the non-WP-4 overruns were also caused by WAL's deficient performance, and therefore WAL should bear indemnity responsibility for the full $14,726,583; and (3) the DCMA's preliminary allocation methodology understates WAL's culpability.
D. WAL's Position and Pre-Litigation Steps
WAL disputes HDDS's indemnification demand on multiple grounds. WAL's position, as developed through our pre-litigation analysis and coordination with WAL's management team, is as follows:
First, the causation requirement of Section 11.4(b) is not satisfied. Section 11.4(b) conditions the indemnity obligation on a showing that the government's cost claim was "caused by Team Member's acts or omissions." WAL contends that the WP-4 cost overruns identified in the COPD were substantially caused by factors outside WAL's control, including: (a) titanium raw-material price escalation, which constitutes a force majeure event or, at a minimum, a market condition beyond WAL's ability to control; (b) rework required due to engineering specifications and technical data packages supplied by HDDS, which contained ambiguities and tolerancing errors that led to non-conforming machining outputs; and (c) schedule delays caused by HDDS's late delivery of GFE and other upstream inputs to WAL's production line.
Second, HDDS's demand improperly includes $1,909,142 in non-WP-4 cost overruns. These overruns relate to work packages outside WAL's scope under the Teaming Agreement, and there is no contractual basis for requiring WAL to indemnify HDDS for cost overruns on work performed by other team members or by HDDS itself.
Third, the COPD is a preliminary determination and does not constitute a formal disallowance or government "claim" within the meaning of Section 11.4(b). Until the Contracting Officer issues a COFD, the triggering condition for WAL's indemnity obligation under clause (b) has not been met.
WAL pursued good-faith efforts to resolve the dispute before filing suit. Marcus J. Whitmore, WAL's Chief Executive Officer, met with William Fong, HDDS's Senior Vice President for Contracts and Procurement, on two occasions — September 30, 2022, and October 14, 2022 — to discuss the indemnification demand and explore a negotiated resolution. Those meetings did not result in an agreement.
On October 21, 2022, WAL formally proposed mediation under Section 18.3 of the Teaming Agreement. HDDS declined the mediation proposal by letter dated October 28, 2022, taking the position that Section 18.3 is permissive ("may") rather than mandatory and that HDDS was under no obligation to submit to mediation. While we believe HDDS's reading of Section 18.3 is likely correct on its face, WAL's good-faith effort to mediate will be relevant to any future assessment of the parties' reasonableness and may influence the court's disposition of any fee-shifting arguments.
Having exhausted its pre-litigation options, WAL filed a declaratory judgment action on November 28, 2022: Whitmore Aerospace LLC v. Hargrove-Dalton Defense Systems, Inc., Case No. 1:22-cv-10147-RMB, in the United States District Court for the Southern District of New York. The case has been assigned to the Honorable Richard M. Brannigan, United States District Judge, with pretrial matters referred to the Honorable Allison P. Kurtz, United States Magistrate Judge. The complaint seeks a declaratory judgment that WAL has no indemnification obligation to HDDS under Section 11.4 of the Teaming Agreement with respect to the $14,726,583 indemnification demand, or, in the alternative, that any indemnification obligation is limited to the extent of costs that are formally disallowed by the government and demonstrated to have been caused by WAL's acts or omissions.
As noted above, we anticipate that HDDS will file its Answer and Counterclaim on or about January 13, 2023. We expect the counterclaim to seek affirmative indemnification under Section 11.4 and potentially to assert a breach-of-contract claim for WAL's alleged failure to comply with the indemnification demand.
E. Coordination with Ashford & Reeves LLP
WAL has separately retained the firm of Ashford & Reeves LLP to serve as government contracts regulatory counsel and to advise WAL on the DCMA administrative proceeding. The engagement is managed by Harold Reeves, Senior Partner, and Natalie Cheng, Associate, at Ashford & Reeves's Washington, D.C. office located at 2001 Pennsylvania Avenue NW, Suite 700, Washington, D.C. 20006. Ashford & Reeves has deep experience in defense-contract administration, DCMA audit response, and Contract Disputes Act proceedings, and its role is complementary to Calderwood & Harkness's role as litigation counsel in the declaratory judgment action.
Calderwood & Harkness is in the process of establishing a formal coordination protocol with Ashford & Reeves to ensure effective information sharing between the administrative track (monitored by Ashford & Reeves) and the litigation track (managed by Calderwood & Harkness). We anticipate finalizing and sending a joint coordination letter in early January 2023 that will establish protocols for document sharing, joint status calls, and privilege-protection procedures to ensure that communications between the two firms on behalf of WAL remain protected by the common-interest and attorney-client privileges.
I note, for purposes of the team's awareness, that my undergraduate background in aerospace engineering (B.S., Virginia Tech, 2015) positions me to assist in the technical review of DCMA audit materials, engineering specifications, and other technical documentation that may arise in connection with both the administrative proceeding and the litigation. I will coordinate with Ashford & Reeves and with WAL's engineering and compliance personnel to ensure that the technical aspects of the cost-overrun analysis are properly understood and reflected in our litigation strategy.
III. THE DCMA ADMINISTRATIVE REVIEW PROCESS UNDER THE CONTRACT DISPUTES ACT
A. Statutory and Regulatory Framework
The administrative review process through which DCMA is evaluating the ATAP cost overruns is governed by the Contract Disputes Act of 1978 ("CDA"), as amended, codified at 41 U.S.C. §§ 7101–7109. The CDA establishes the exclusive statutory framework for resolving disputes arising under or relating to government contracts, including disputes over cost allowability and allocability under cost-reimbursement contracts. The implementing regulations are found in FAR Part 33 (Disputes and Appeals) and, for Department of Defense contracts, in the corresponding DFARS provisions, including DFARS 252.233-7001 (Choice of Law — Disputes).
The CDA process, in its most general form, operates as follows: a claim is submitted to the Contracting Officer ("CO"); the CO renders a final decision on the claim; and the contractor may then appeal the CO's decision to the Armed Services Board of Contract Appeals ("ASBCA") or, alternatively, bring a de novo action in the United States Court of Federal Claims. The CDA applies to both government claims (initiated by the CO against the contractor, typically in the form of cost disallowances, withholdings, or assessments) and contractor claims (submitted by the contractor seeking additional compensation, equitable adjustment, or other relief).
In the present case, the procedural posture is somewhat nuanced. The COPD was initiated by ACO Lt. Col. Vickers, reflecting DCMA's preliminary assessment that cost overruns exist and should be addressed. HDDS, in its October 15, 2022 filing, responded to the COPD by disputing the allocation methodology and requesting that the CO issue a formal COFD. This procedural posture effectively positions the matter as a government-initiated cost-overrun determination that the prime contractor (HDDS) is contesting. While HDDS's filing could also be characterized as a contractor claim to the extent HDDS is asserting that the government's allocation methodology is flawed, the fundamental nature of the proceeding remains a government-initiated review of cost performance on the ATAP contract.
It is important to note that the CDA and its associated administrative processes apply exclusively to the prime contract relationship between HDDS and the United States government. WAL, as a subcontractor and team member under the Teaming Agreement, is not a party to the prime contract and does not have privity of contract with the government. WAL therefore does not have standing to submit claims under the CDA, nor is WAL directly subject to the CO's COFD. Nevertheless, the COFD's findings will have significant practical — and potentially persuasive — implications for the indemnity dispute between WAL and HDDS.
B. Stages of the Administrative Review
The DCMA administrative review process for a cost-overrun dispute of this nature typically proceeds through the following stages:
1. Contracting Officer's Preliminary Determination (COPD). This is the stage at which the current proceeding originated. On August 1, 2022, ACO Lt. Col. Vickers issued the COPD, which identified the $14,726,583 in total cost overruns and set forth a preliminary allocation among work packages. The COPD is not a binding determination; rather, it serves as a notice to the contractor of the government's preliminary findings and invites the contractor to respond with additional information, documentation, and argument. The COPD creates the procedural predicate for the contractor to engage with the CO before a final decision is rendered.
2. Contractor Response. On October 15, 2022, HDDS filed its formal response to the COPD. The response disputed the allocation methodology employed by DCMA and provided supporting documentation — including cost-accounting records, incurred-cost submissions, and engineering documentation — in support of HDDS's position that the cost allocation should be revised. HDDS also formally requested that the CO issue a COFD under the CDA, thereby initiating the formal decision-making process.
3. Field Audit. Following receipt of the contractor's response, DCMA typically initiates a field audit of the prime contractor's cost records. For a dispute involving subcontractor cost performance, such as the WP-4 overruns at issue here, the field audit is likely to encompass not only the prime contractor's records but also the subcontractor's cost records. DCMA auditors will review incurred-cost submissions, timekeeping and labor-distribution records, material procurement records (including titanium purchase orders and invoices), engineering documentation (including specifications, drawings, and ECP records), and any other records bearing on the allowability, allocability, and reasonableness of the incurred costs under the applicable cost principles set forth in FAR Part 31. We expect that DCMA may request access to WAL's WP-4 cost data through HDDS, as the prime contractor has a contractual obligation to provide access to subcontractor records for audit purposes.
4. Internal Legal Review. Upon completion of the field audit, the DCMA headquarters legal counsel conducts an internal legal review of the audit findings and the CO's proposed final determination. This review assesses the legal sufficiency of the proposed COFD, ensures compliance with the CDA and applicable regulations, and evaluates whether the proposed determination is adequately supported by the factual record. The internal legal review may result in revisions to the proposed COFD before it is finalized and issued.
5. Contracting Officer's Final Decision (COFD). The COFD represents the culmination of the administrative review process and constitutes the government's formal, binding (at first instance) determination on the cost-overrun dispute. The COFD is issued by the ACO and sets forth the CO's findings of fact, conclusions regarding cost allowability and allocation, and the resulting financial adjustments. The COFD triggers the contractor's CDA appeal rights: HDDS would have 90 days from receipt of the COFD to file an appeal with the Armed Services Board of Contract Appeals, or 12 months to file a claim in the United States Court of Federal Claims.
6. Potential Appeal. If HDDS or the government is dissatisfied with the COFD, either party may pursue further review. An appeal to the ASBCA involves a de novo hearing on the factual and legal issues, with testimony, documentary evidence, and briefing. An action in the Court of Federal Claims likewise involves a de novo proceeding. The appeal stage could add one to three years to the overall timeline, depending on the complexity of the issues and the forum selected.
C. Expected Timeline
Based on publicly available DCMA processing data, historical patterns in cost-overrun disputes of comparable magnitude on CPIF contracts, and the experience of Ashford & Reeves in monitoring such proceedings, the typical timeline from issuance of a COPD to issuance of a COFD for a dispute of this scale (approximately $14.7 million in total overruns on a $412 million CPIF contract) is approximately 12 to 24 months.
Applying this timeline to the facts of the present case, and considering that the COPD was issued on August 1, 2022, and the contractor's formal response was filed on October 15, 2022, we would expect the following approximate milestones:
These projections are necessarily rough estimates and could be extended depending on the complexity of the cost analysis, the volume of documentation to be reviewed, any delays in the internal legal review process, and the CO's workload and priorities. The field audit, in particular, can be time-consuming when it involves subcontractor cost records, as the auditors must coordinate with both the prime contractor and the subcontractor to obtain and review the relevant data.
It bears noting that WAL has no direct standing in the DCMA proceeding. As a subcontractor, WAL is not a party to the prime contract and cannot submit claims or responses directly to the CO. WAL's interests in the administrative proceeding are represented indirectly through its contractual relationship with HDDS — which, given the adversarial posture between the parties, is an imperfect arrangement — and are monitored by Ashford & Reeves, which is tracking the proceeding on WAL's behalf and will advise WAL on any developments that affect WAL's interests.
D. WAL's Access to and Participation in the Administrative Process
WAL's lack of privity with the government limits its ability to participate directly in the DCMA administrative review. WAL cannot submit claims, file responses, or appear before the CO in its own right. However, WAL's participation is not entirely foreclosed.
WAL may provide information and documentation to DCMA through HDDS, as the prime contractor. Under the terms of the prime contract, HDDS is obligated to provide the government with access to cost records of its subcontractors for audit purposes, and DCMA may specifically request that HDDS produce WAL's WP-4 cost data as part of the field audit. Catherine Soo-Hyun Park, Vice President of Government Contracts and Compliance at WAL, has been designated as the internal point of contact for any DCMA audit data requests related to WP-4. Ms. Park's office maintains the relevant incurred-cost data, timekeeping records, material procurement files, and engineering documentation, and is prepared to respond promptly to any requests channeled through HDDS or directly from DCMA.
WAL's facility security clearance at the SECRET level, maintained at its production facilities, and its established relationship as a known entity within the DCMA Northern Virginia contracting community, may facilitate a cooperative posture with DCMA's audit team. While WAL cannot formally participate in the administrative proceeding, a cooperative and transparent approach to data production is likely to serve WAL's interests, as it may help ensure that DCMA's cost analysis accurately reflects the circumstances that gave rise to the WP-4 overruns — including the exogenous factors (titanium price escalation, HDDS specification issues, GFE delays) that WAL contends were the true root causes.
Ashford & Reeves will monitor whether the field audit encompasses WAL's WP-4 cost records directly and will advise WAL on any data-production obligations that may arise. Ashford & Reeves will also monitor the progress of the administrative review and provide regular updates to Calderwood & Harkness for purposes of coordinating the litigation strategy.
IV. IMPLICATIONS OF POTENTIAL COFD OUTCOMES FOR THE DECLARATORY JUDGMENT ACTION
The COFD, when issued, will have significant implications for the declaratory judgment action. While the COFD is a determination in the prime-contract proceeding and is not binding on the court in the WAL-HDDS litigation, it will constitute the government's authoritative assessment of cost allowability, cost allocation, and root causation for the ATAP overruns. As such, it will be highly probative evidence on the key factual questions underlying the indemnity dispute. This section analyzes three potential COFD scenarios and their respective implications.
A. Scenario 1: COFD Confirms Full $14,726,583 Allocation, Including $12,817,441 to WP-4
Under this scenario, the Contracting Officer's Final Decision would confirm the COPD's findings and formally determine that $12,817,441 in WP-4 cost overruns are unallowable, unreasonable, or otherwise subject to disallowance under the applicable cost principles (FAR Part 31). The remaining $1,909,142 in non-WP-4 overruns would likewise be confirmed.
If this scenario materializes, HDDS's indemnity claim under Section 11.4(b) of the Teaming Agreement would gain significant factual support. A COFD formally determining that costs under WAL's Work Package are unallowable or unreasonable would arguably constitute the government "claim" required to trigger the indemnity provision. The existence of a formal government determination, issued after a comprehensive audit and legal review, would be difficult to dismiss as merely preliminary or speculative.
However, even under this worst-case scenario, WAL retains significant defenses. Section 11.4(b) does not impose strict liability; it requires that the government's cost claim be "caused by Team Member's acts or omissions." The causation element is the critical battleground. The COFD's root-cause analysis will determine whether the overruns were attributable to WAL's own conduct or to factors beyond WAL's control:
• If the COFD attributes causation to WAL — for example, by finding that the rework costs were caused by WAL's machining errors rather than by deficiencies in the HDDS-supplied engineering specifications — then WAL's litigation position weakens materially. Under such a finding, HDDS would have both the formal government determination and a causal link to WAL's conduct.
• If, on the other hand, the COFD attributes causation to factors outside WAL's control — such as HDDS-supplied specifications that were ambiguous or contained tolerancing errors, government-caused delays in GFE delivery, or market-driven titanium price escalation — then WAL's defenses under the causation element remain strong, even if the costs themselves are formally disallowed.
Importantly, regardless of the COFD's causation findings, the non-WP-4 overruns ($1,909,142) should remain outside any indemnity obligation under Section 11.4. These overruns relate to work packages outside WAL's scope, and there is no basis in the Teaming Agreement for attributing costs from other work packages to WAL's indemnity obligation. HDDS's demand for the full $14,726,583 is overbroad on its face, and the COFD should reinforce this conclusion by allocating the non-WP-4 overruns to their respective work packages.
Litigation Impact: This is the strongest scenario for HDDS and the most challenging for WAL. If the COFD confirms the COPD's allocation and attributes causation to WAL, WAL would need to focus its litigation strategy on challenging the applicability of the COFD's findings in the contract-dispute context, contesting causation through independent engineering and cost-accounting evidence, and pressing its argument that the $1,909,142 in non-WP-4 overruns are categorically excluded from any indemnity obligation. Discovery in the DJ action would need to develop evidence on the root-cause questions that the COFD's analysis may not have fully resolved, particularly regarding the role of HDDS's specifications and GFE delays.
B. Scenario 2: COFD Reduces the Amount Attributed to WP-4
Under this scenario, the COFD would revise the cost allocation downward from the COPD's preliminary figures. This could occur if DCMA's field audit determines that some of the WP-4 overruns were actually caused by HDDS-directed engineering changes, government-caused schedule delays, or other factors properly attributable to the prime contractor or the government rather than to the subcontractor. For example, the COFD might determine that the $1,200,000 in ECP implementation costs should be borne by HDDS (as the party that directed the changes) or that the $2,300,000 in idle-labor charges attributable to GFE delivery delays should be treated as an excusable delay rather than a cost for which WAL bears responsibility.
A downward revision would strengthen WAL's position in several respects:
• It would confirm that HDDS's $14,726,583 indemnity demand is overbroad, lending credibility to WAL's contention that HDDS is seeking to shift costs that are not properly WAL's responsibility.
• It would narrow the factual predicate for the Section 11.4(b) indemnity claim, reducing the dollar amount at issue and potentially eliminating entire categories of overruns from the indemnity analysis.
• It would shift the burden to HDDS to justify a reduced indemnity claim against a revised factual baseline, making it more difficult for HDDS to sustain its aggressive litigation posture.
• It would create meaningful settlement leverage for WAL. If the COFD reduces the WP-4 allocation by 30%–50%, for example, the settlement calculus changes dramatically, and HDDS may conclude that the cost and risk of pressing the full indemnity claim are not warranted.
Litigation Impact: This scenario is favorable to WAL. Depending on the magnitude of the reduction, it could provide a basis for partial summary judgment on the excess amounts — i.e., the amounts by which HDDS's demand exceeds the COFD's allocation — and could set the stage for a settlement that resolves the remaining disputed amounts on terms favorable to WAL.
C. Scenario 3: COFD Finds No Disallowable Costs or Substantially Reduces Total Overruns
Under the most favorable scenario for WAL, the COFD would determine that the identified cost overruns are allowable and allocable under the CPIF contract terms and the applicable cost principles of FAR Part 31. This could occur if DCMA's field audit concludes that the overruns were attributable to reasonable cost increases (e.g., titanium market pricing), excusable delays, or government-directed changes — in other words, factors that are inherent in the cost-reimbursement contract structure and do not give rise to a formal disallowance.
If the COFD finds no disallowable costs, the impact on the declaratory judgment action would be decisive. Section 11.4(b) of the Teaming Agreement requires a government "claim" that costs are "unallowable, unreasonable, or otherwise subject to disallowance" as a precondition for WAL's indemnity obligation. If the COFD affirmatively determines that the costs at issue are allowable, there is no triggering event under Section 11.4(b), and HDDS's indemnity claim collapses for lack of a factual predicate. HDDS's counterclaim in the DJ action would be left without the governmental determination on which it is premised.
Litigation Impact: This is the most favorable scenario for WAL. It would provide a strong basis for a dispositive motion — either summary judgment on WAL's declaratory judgment claim or dismissal of HDDS's counterclaim. Alternatively, it could prompt HDDS to voluntarily dismiss its counterclaim and reconsider its litigation posture, potentially leading to a negotiated resolution on favorable terms.
D. Impact of a COFD on the Parties' Respective Burdens in the DJ Action
Several additional points merit consideration regarding the interplay between the COFD and the DJ action:
Burdens of Proof. In the declaratory judgment action, WAL, as the plaintiff, bears the initial burden of showing entitlement to declaratory relief — i.e., that the court should exercise its discretion to declare that WAL has no indemnification obligation (or a limited one) under Section 11.4. On HDDS's anticipated counterclaim, HDDS will bear the burden of proving its affirmative indemnification claim, including the existence of a triggering event under Section 11.4(b) and the causal nexus between WAL's acts or omissions and the government's cost determination.
Probative and Preclusive Effect of the COFD. The COFD, while not binding on the court in the DJ action (which arises under New York contract law rather than the CDA), would be highly probative on the factual questions at the heart of the dispute. Courts routinely consider administrative agency determinations as persuasive evidence on factual issues within the agency's specialized competence, and the COFD's detailed cost analysis and root-cause findings would carry significant evidentiary weight. Depending on the level of factual specificity in the COFD, it might be treated as presumptively correct on certain technical cost-accounting questions, placing the burden on the opposing party to rebut the agency's findings.
The question of whether the COFD might have preclusive effect (i.e., collateral estoppel or issue preclusion) is more complex and depends on whether the findings in the COFD satisfy the requirements of the preclusion doctrine — including whether the issues were actually litigated, whether they were necessarily decided, and whether the party against whom preclusion is sought had a full and fair opportunity to contest the findings. Because WAL is not a party to the CDA proceeding and HDDS may appeal the COFD, the preclusion analysis is uncertain, but the practical persuasive impact of the COFD is likely to be substantial regardless of its formal preclusive effect.
Impact of a COFD Appeal. If HDDS appeals the COFD to the ASBCA or the Court of Federal Claims, the appeal would further delay finality but would also generate additional factual findings through a more formal adjudicative process. An ASBCA decision, for example, would include detailed findings of fact and conclusions of law that could be even more probative (and potentially preclusive) than the COFD itself. However, an appeal could add one to three years to the timeline, which would need to be factored into the stay analysis.
V. PRIMARY-JURISDICTION DOCTRINE ANALYSIS
A. Legal Standard
The primary-jurisdiction doctrine is a common-law prudential doctrine that applies where a claim pending before a court requires the resolution of issues that, under a regulatory scheme, have been placed within the special competence of an administrative body. The doctrine allows the court to stay or dismiss proceedings pending the administrative body's resolution of the relevant issues, thereby ensuring that the court has the benefit of the agency's expertise and avoiding the risk of inconsistent determinations. See Reiter v. Cooper, 507 U.S. 258, 268 (1993); Ellis v. Tribune Television Co., 443 F.3d 71, 81 (2d Cir. 2006).
It is critical to distinguish the primary-jurisdiction doctrine from the exhaustion-of-administrative-remedies doctrine. Exhaustion requires a party to pursue available administrative remedies before seeking judicial relief. Here, WAL is not a party to the CDA proceeding and has no administrative remedies to exhaust; the CDA's administrative process applies to the prime contractor (HDDS) and the government. The primary-jurisdiction doctrine, by contrast, does not depend on whether the party before the court has its own administrative remedies. Rather, it focuses on whether an agency proceeding — even one involving different parties — is addressing issues that the agency is better positioned than the court to resolve, such that a stay would serve the interests of sound judicial administration.
The Second Circuit has identified several factors relevant to the primary-jurisdiction analysis:
(1) Whether the agency determination demands the agency's specialized expertise — that is, whether the issues involve technical or regulatory matters within the agency's particular competence;
(2) Whether the issue is within the agency's jurisdiction — that is, whether the administrative body has been charged with regulatory authority over the subject matter;
(3) Whether judicial resolution might conflict with the agency's determination — that is, whether there is a risk that the court and the agency could reach inconsistent factual or legal conclusions; and
(4) Whether a stay would unduly prejudice the parties — that is, whether the delay associated with the administrative proceeding would cause significant harm to either side.
See Ellis, 443 F.3d at 82–83; Goya Foods, Inc. v. Tropicana Prods., Inc., 846 F.2d 848, 851 (2d Cir. 1988); Nat'l Commc'ns Ass'n v. Marlowe Partners LLC, 46 F.3d 220, 222–23 (2d Cir. 1995). The application of the doctrine is discretionary, and the court weighs the relevant factors in light of the particular circumstances of the case.
B. Application to This Case
Each of the four factors supports the application of the primary-jurisdiction doctrine in this case and the entry of a stay pending the COFD.
1. Specialized Expertise. DCMA and the Contracting Officer possess specialized expertise that is directly relevant to the core factual questions in this dispute. The cost-overrun analysis underlying the COPD and the forthcoming COFD involves highly technical determinations regarding cost allowability under FAR Part 31 (including the cost-accounting standards for material costs, labor costs, and engineering costs), cost allocation among work packages under a complex CPIF contract structure, and the root-cause analysis required to determine whether identified cost overruns are attributable to the contractor's performance deficiencies, government-caused factors, or external market conditions.
These are precisely the types of determinations that the CDA and FAR Part 33 entrust to the Contracting Officer — a government official with training and experience in defense-contract administration, cost accounting, and procurement regulation. The court in the DJ action, while fully competent to resolve contract-interpretation questions under New York law, would benefit significantly from the CO's expert determination on the underlying factual questions of cost allowability and causation. Requiring the court to make independent cost-accounting and root-cause findings without the benefit of the COFD would be inefficient and would risk producing results at odds with the government's own analysis.
2. Agency Jurisdiction. The CDA vests the Contracting Officer with authority to issue final decisions on disputes "relating to" government contracts. 41 U.S.C. § 7103(a)(1). The cost-overrun determination under Prime Contract No. FA8620-19-C-0337 falls squarely within the CO's jurisdiction. The proceeding that HDDS has initiated by requesting a COFD is the precise mechanism that Congress established for resolving government-contract cost disputes at first instance. While the CO's jurisdiction extends only to the prime-contract relationship (and not to the subcontract/teaming agreement dispute between WAL and HDDS), the factual issues in the administrative proceeding substantially overlap with the factual issues in the DJ action.
3. Risk of Conflicting Determinations. If the court in the DJ action were to reach factual conclusions regarding the WP-4 cost overruns before the COFD issues, there is a significant risk of inconsistent factual findings. For example, the court might determine that the $5,100,000 in rework costs was "caused by" WAL's machining errors, while the COFD might subsequently determine that the same costs were caused by deficiencies in HDDS's engineering specifications. Such an inconsistency would create confusion, undermine confidence in both proceedings, and potentially create res judicata or collateral estoppel complications if HDDS appeals the COFD to the ASBCA or Court of Federal Claims. The risk of conflicting determinations strongly weighs in favor of allowing the administrative process to proceed to conclusion before the court resolves the overlapping factual issues.
4. Prejudice. Neither party would be unduly prejudiced by a stay. The DCMA administrative review is expected to conclude within 12 to 24 months, a timeframe that, while not insignificant, is well within the range that courts have deemed acceptable for stays based on primary jurisdiction. WAL has filed its DJ action and thereby preserved its rights; a stay does not extinguish those rights or affect the court's jurisdiction. The case can be reactivated promptly upon the issuance of the COFD.
Moreover, we have received informal indications through communications with HDDS's counsel, Leonard Trager of VTK, that HDDS may not oppose a stay. This is understandable from HDDS's perspective: HDDS itself would benefit from the COFD before pressing its anticipated counterclaim, as the COFD will determine the government's formal position on cost allowability and allocation — a position that HDDS will need to address regardless of the outcome of the DJ action. If HDDS agrees to stipulate to a stay, the prejudice analysis is further reinforced.
C. Conclusion on Primary Jurisdiction
For the foregoing reasons, the primary-jurisdiction doctrine strongly supports a stay of the DJ action pending the issuance of the COFD. The DCMA's specialized expertise in cost-accounting determinations, the overlap between the administrative issues and the DJ action's factual predicate, the risk of conflicting determinations, and the absence of undue prejudice to either party all weigh in favor of a stay. The stay is consistent with principles of judicial economy and orderly administration of justice and will position the court to benefit from the COFD's findings when the DJ action resumes.
VI. STRATEGIC RATIONALE FOR SEEKING A STAY
A. Benefits to WAL
A stay of the DJ action pending the COFD offers several concrete strategic benefits to WAL:
1. Cost Savings. Active federal litigation involving discovery, depositions, expert reports, and dispositive motion practice is expensive. Based on our preliminary assessment and the engagement letter for this matter, the estimated cost of litigating the DJ action through trial is $1.8 million to $2.4 million. A stay would significantly reduce near-term litigation expenditures by deferring the most expensive phases of the case (Discovery, expert analysis, summary judgment briefing) until the COFD provides a clearer factual basis for the dispute. During the stay period, Calderwood & Harkness's costs would be limited to monitoring-level expenditures — periodic status calls, coordination with Ashford & Reeves, and preparation for the resumption of active litigation. This represents a substantial cost savings for WAL, particularly in light of the uncertainty regarding the COFD's outcome.
2. Information Asymmetry Advantage. The COFD will reveal DCMA's detailed cost analysis and root-cause findings, providing WAL with a comprehensive factual picture that would otherwise have to be developed independently at significant cost. If WAL were to proceed with active litigation now, it would need to retain forensic cost-accounting experts to conduct an independent analysis of the WP-4 overruns — essentially duplicating the analysis that DCMA is already performing. By waiting for the COFD, WAL can benefit from the government's analysis (which, importantly, is produced by a neutral agency rather than an adversarial party) and can use it to refine its litigation position, shape its expert-witness strategy, and focus its discovery on the issues that remain genuinely disputed after the COFD issues.
3. Settlement Leverage. The COFD's outcome will have a material impact on the parties' respective settlement positions. If the COFD is favorable to WAL — by reducing the WP-4 allocation (Scenario 2) or finding no disallowable costs (Scenario 3) — WAL's settlement leverage will increase substantially. A favorable COFD would undermine the factual basis for HDDS's indemnity demand and make it more difficult for HDDS to justify an aggressive litigation posture. Conversely, if the COFD is unfavorable (Scenario 1), WAL would at least have the benefit of knowing the government's position before committing additional litigation resources, allowing for a more informed assessment of whether settlement or continued litigation is the better course. In either case, the COFD provides a critical data point that will inform the parties' settlement calculus.
4. Preservation of Defenses. A stay preserves all of WAL's defenses in the DJ action. The court retains jurisdiction over the case, and WAL's complaint remains pending. The case can be reactivated promptly — within 60 days of the COFD's issuance, under the proposed stay terms — and WAL can then proceed with the full benefit of the administrative record. No statute of limitations or repose issues are implicated by a stay, as the DJ action has already been filed and the case remains on the court's docket.
B. Risks of a Stay
While the benefits of a stay are compelling, several risks should be acknowledged and monitored:
1. Delay. The most significant risk of a stay is delay. The DCMA review could take longer than the projected 12–24 months, particularly if the field audit is complex, the internal legal review is protracted, or the CO's other priorities intervene. A delay beyond the projected timeline would extend the period of uncertainty for WAL and the corresponding contingent-liability disclosure in WAL's financial statements. At present, the indemnity contingency is expected to be treated as "reasonably possible" under ASC 450 (Contingencies) in WAL's FY 2022 audited financial statements, as prepared by Pinnacle Advisory Partners LLC (engagement partner Thomas Brennan, CPA). Mr. Brennan's preliminary assessment, communicated to WAL management, is that the $14,726,583 contingent liability does not meet the "probable" threshold for accrual but warrants disclosure as "reasonably possible." The FY 2022 audit is expected to be completed by April 14, 2023, and the contingent-liability disclosure will need to be maintained in subsequent fiscal years for as long as the matter remains unresolved. While a prolonged stay does not alter the accounting treatment (the contingency would need to be disclosed regardless of whether the litigation is active or stayed), it does extend the period during which WAL's financial statements carry the disclosure.
2. Stale Evidence. Litigation delay always carries the risk that witness memories will fade and that documents or other evidence may become harder to locate over time. However, this risk is substantially mitigated by the litigation hold notice that WAL issued on November 2, 2022, which directs all relevant WAL personnel to preserve documents and electronic records relating to the ATAP program, WP-4 cost performance, and the indemnity dispute. The litigation hold covers all document custodians identified in our initial preservation analysis, including Catherine Soo-Hyun Park (VP, Government Contracts & Compliance), WAL's engineering and production management personnel, and the relevant finance and accounting staff. We will ensure that the litigation hold remains in effect throughout the stay period and will conduct periodic compliance checks. Additionally, the key factual witnesses — including Mr. Whitmore, Ms. Park, and the WAL engineering and production leads — remain employed by WAL and are available for deposition and trial testimony when the case resumes.
3. HDDS May Change Position. While we have received informal indications from VTK that HDDS may not oppose a stay, this is not guaranteed. HDDS could elect to press for active litigation on its counterclaim, either because it views early discovery as advantageous or because it wishes to maintain pressure on WAL. If HDDS opposes the stay, we would need to brief the motion on a contested basis, which would require a more developed argument on the primary-jurisdiction doctrine and a fuller evidentiary record regarding the status and expected timeline of the DCMA proceeding. We should be prepared for this contingency, and the analysis in Section V above provides the framework for the contested-motion briefing.
4. Lender and Insurer Implications. WAL has notified Ridgeline National Bank, N.A. ("Ridgeline") of the indemnity dispute and the DJ action on two occasions — September 28, 2022, and December 5, 2022 — in compliance with Section 6.07(b) of WAL's $75 million senior secured revolving credit facility (the litigation-disclosure covenant, which requires notification of any litigation or threatened litigation involving a potential liability exceeding $5 million). David Kreutz, the relationship manager at Ridgeline, has acknowledged receipt of both notices. Additionally, Meridian Surety & Insurance Group ("Meridian") issued a reservation-of-rights letter on November 1, 2022, with respect to WAL's Directors & Officers Policy (No. MSI-DO-2022-07814) and Commercial General Liability Policy (No. MSI-CGL-2021-33291). Both Ridgeline and Meridian are monitoring the matter. A prolonged stay does not resolve the contingent-liability overhang for either the lender or the insurer, but it also does not worsen the situation — the contingent liability exists regardless of whether the litigation is active or stayed, and the stay does not affect WAL's compliance with its notification obligations. We recommend continued periodic updates to Ridgeline and Meridian throughout the stay period.
C. Recommended Approach
Based on the foregoing analysis of benefits and risks, I recommend the following course of action:
1. Timing. File a motion to stay in early-to-mid February 2023, after HDDS files its expected Answer and Counterclaim (anticipated on or about January 13, 2023). Filing the motion after the answer is filed ensures that both parties' positions are framed on the docket and avoids any argument that the motion is premature.
2. Joint Stipulation. Approach VTK (Leonard Trager and Megan Forsythe, the litigation associates handling the matter for HDDS) to determine whether HDDS is willing to stipulate to a stay. A joint stipulation would significantly simplify the motion, reduce briefing costs, and increase the likelihood of a favorable ruling. Given the informal indications we have received, there is a reasonable prospect that HDDS will agree to a stipulation.
3. Proposed Terms. Propose that the stay remain in effect until 60 days after the issuance of the COFD, or until further order of the court. The 60-day period allows both parties time to review the COFD's findings and assess their implications for the DJ action before active litigation resumes.
4. Status Reporting. Propose 120-day joint status reporting intervals to keep the court informed of the progress of the DCMA administrative review and maintain the litigation posture. The joint status reports would be filed as letter briefs and would summarize the current status of the DCMA proceeding, any significant developments, and the parties' positions on whether the stay should continue.
5. Coordination with Ashford & Reeves. Continue to coordinate closely with Harold Reeves and Natalie Cheng at Ashford & Reeves to monitor the DCMA timeline and receive regular updates on the administrative proceeding. This coordination is essential to ensuring that we have timely and accurate information about the progress of the field audit, the internal legal review, and the anticipated timing of the COFD. The formal coordination protocol (discussed in Section II.E) should be finalized in early January 2023.
VII. ADDITIONAL CONSIDERATIONS
A. Impact on Insurance Coverage
Meridian's reservation-of-rights letter, dated November 1, 2022, reserves Meridian's rights to deny coverage on two principal grounds. First, Meridian reserves on the contractual-liability exclusion (Exclusion (b) of the standard CGL form), which excludes coverage for liability assumed under a contract. Meridian takes the position that WAL's potential indemnity obligation under Section 11.4 of the Teaming Agreement may constitute a contractual liability within the scope of this exclusion. Second, Meridian reserves on the government-contract exclusion (Endorsement GC-04 to the CGL Policy), which excludes coverage for claims arising out of government-contract cost disallowances.
At present, Meridian is not providing a defense to WAL in the DJ action and is not funding the litigation. This means that all litigation costs are being borne by WAL directly, which underscores the importance of cost-management strategies such as the proposed stay.
A stay of the DJ action does not prejudice WAL's coverage rights. The stay does not constitute a waiver of WAL's claims against Meridian, nor does it alter the terms or conditions of the applicable insurance policies. Indeed, the stay may ultimately benefit the coverage analysis: if the COFD clarifies the nature of the underlying claim — for example, by determining that the overruns are attributable to factors outside WAL's control rather than to WAL's contractual performance — it may undermine Meridian's reliance on the contractual-liability and government-contract exclusions.
We recommend continued follow-up with Rachel Underwood, the claims examiner at Meridian assigned to this matter, to press for a definitive coverage determination. The coverage question can and should be revisited once the COFD clarifies the nature and scope of the underlying claim, at which point WAL may be in a stronger position to obtain coverage or to challenge a denial of coverage if necessary.
B. Financial Statement and Audit Implications
As noted above, Pinnacle Advisory Partners LLC (Thomas Brennan, CPA, Engagement Partner) is expected to address the indemnity contingency in WAL's FY 2022 audited financial statements under ASC 450 (Contingencies). Based on preliminary discussions with Mr. Brennan, the expected treatment is as follows:
• The $14,726,583 indemnity demand will be disclosed in the footnotes to the financial statements as a contingent liability that is "reasonably possible" but not "probable."
• No accrual will be recorded, as the loss does not currently meet the "probable" threshold under ASC 450.
• The footnote disclosure will describe the nature of the contingency, the amount of the demand, and the status of the litigation and administrative proceedings.
A stay of the DJ action does not alter this accounting treatment. The contingent liability exists by virtue of HDDS's indemnity demand and the pending litigation, and its treatment under ASC 450 is based on the probability of loss — a determination that depends on the merits of the dispute, not on the pace of the litigation. The stay may, in fact, facilitate a more accurate probability assessment in future periods: once the COFD issues, WAL and its auditors will have a clearer basis for evaluating the likelihood of loss and determining whether the accounting treatment should be adjusted.
WAL's FY 2022 revenue of approximately $287 million and its ongoing operations are not materially disrupted by the adoption of a stay posture. The contingent liability, while significant in absolute terms, represents less than 5.2% of WAL's annual revenue and is not expected to impair WAL's financial condition or operational capacity.
C. Credit Facility Compliance
WAL maintains a $75 million senior secured revolving credit facility with Ridgeline National Bank, N.A. The credit facility is currently drawn to $31.2 million, leaving $43.8 million in available borrowing capacity. Section 6.07(b) of the cred

INTERNAL MEMORANDUM

MATTER NO.: 1019-00005

I. EXECUTIVE SUMMARY

II. BACKGROUND

III. THE DCMA ADMINISTRATIVE REVIEW PROCESS UNDER THE CONTRACT DISPUTES ACT

IV. IMPLICATIONS OF POTENTIAL COFD OUTCOMES FOR THE DECLARATORY JUDGMENT ACTION

V. PRIMARY-JURISDICTION DOCTRINE ANALYSIS

VI. STRATEGIC RATIONALE FOR SEEKING A STAY

VII. ADDITIONAL CONSIDERATIONS

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