1019-00005 · Whitmore Aerospace LLC · Analysis

memo-dcma-field-audit-update.docx DOCUMENT Litigation

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PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT

INTERNAL MEMORANDUM

I. Purpose and Summary

The purpose of this memorandum is to summarize information received from Ashford & Reeves LLP — specifically, from Harold Reeves, Senior Partner, and Natalie Cheng, Associate — regarding the current status of the Defense Contract Management Agency ("DCMA") field audit being conducted under Prime Contract No. FA8620-19-C-0337, as that audit pertains to the cost overruns identified in the August 1, 2022 Contracting Officer's Preliminary Determination ("COPD") and the pending indemnification dispute between our client, Whitmore Aerospace LLC ("WAL"), and Hargrove-Dalton Defense Systems, Inc. ("HDDS").

Bottom line: The DCMA field audit remains ongoing. No Contracting Officer's Final Decision ("COFD") has been issued by Administrative Contracting Officer ("ACO") Lt. Col. Sandra M. Vickers, USAF, stationed at DCMA Northern Virginia. The administrative review remains squarely in its fact-gathering and audit phase, with no indication from DCMA as to when the field audit will conclude or when a COFD might be forthcoming.

This status carries several implications for the pending declaratory judgment action before Judge Brannigan in the Southern District of New York. Most significantly, the stay entered by the Honorable Richard M. Brannigan on March 17, 2023, remains appropriate and well-founded. There is no basis, strategic or otherwise, for either party to seek to lift or modify the stay at this time. The underlying administrative proceeding — the resolution of which the Court correctly recognized would likely resolve or substantially narrow the factual predicate for the indemnity dispute — has not progressed to a point at which action in the litigation would serve any purpose.

The next joint status report required under the Court's stay order is due on or about November 12, 2023, which is 120 days from the date of the first joint status report filed on July 15, 2023. Patrick Gallagher should begin coordinating with opposing counsel in the coming weeks to prepare that filing.

II. Background

A. The Underlying Dispute

On August 1, 2022, DCMA issued a Contracting Officer's Preliminary Determination ("COPD") identifying aggregate cost overruns of $14,726,583 on the Advanced Tactical Airframe Program ("ATAP"), a major defense acquisition program managed under Prime Contract No. FA8620-19-C-0337 between HDDS, as the prime contractor, and the United States Air Force.

The COPD attributed $12,817,441 of the total cost overruns — representing approximately 87.03% — to Work Package 4 ("WP-4"), which encompasses the titanium structural assembly work package. WP-4 is the scope of work performed by WAL in its capacity as subcontractor and teaming partner to HDDS under the Teaming Agreement executed by the parties on June 12, 2019. The remaining $1,909,142, or approximately 12.97% of the identified overruns, was attributed by DCMA to other work packages under the prime contract for which HDDS bears direct performance responsibility.

The COPD's narrative section broke down the WP-4 overrun components into four principal categories:

(a) Titanium raw-material cost escalation — approximately $4.2 million, reflecting a significant increase in the market price of aerospace-grade titanium alloys during the relevant performance period, driven in large part by supply-chain disruptions and geopolitical factors;

(b) Rework costs due to non-conforming machining tolerances — approximately $5.1 million, arising from alleged deviations from engineering specifications in the machining of titanium structural components, which HDDS contends necessitated substantial rework at WAL's Chantilly facility;

(c) Schedule delays causing idle-labor charges — approximately $2.3 million, attributed to delays in the WP-4 production timeline that resulted in billable but unproductive labor hours for personnel assigned to the program; and

(d) Engineering change proposal ("ECP") implementation costs — approximately $1.2 million, associated with the incorporation of government-directed engineering changes into the WP-4 work scope.

On September 9, 2022, HDDS transmitted to WAL a formal indemnification demand for the full $14,726,583 in identified cost overruns. The demand letter, signed by HDDS's General Counsel, invoked Section 11.4 of the Teaming Agreement, which contains the indemnification provision at the center of this dispute. Notably, the demand was for the entire $14,726,583, not merely the $12,817,441 attributed specifically to WP-4 in the COPD — a point that WAL has consistently contested as overreaching, given that a meaningful portion of the overruns was attributed to work packages outside WAL's scope.

On October 15, 2022, HDDS filed a formal response to the COPD together with a request that ACO Lt. Col. Vickers issue a Contracting Officer's Final Decision under the Contract Disputes Act, 41 U.S.C. § 7103. That request remains pending, and no COFD has been issued to date.

B. The DJ Action and Stay

On November 28, 2022, WAL, through this firm, filed a Verified Complaint for Declaratory Judgment in the United States District Court for the Southern District of New York, initiating the action captioned Whitmore Aerospace LLC v. Hargrove-Dalton Defense Systems, Inc., Case No. 1:22-cv-10147-RMB. The Complaint was assigned to the Honorable Richard M. Brannigan, United States District Judge. The Complaint seeks declarations that Section 11.4 of the Teaming Agreement does not obligate WAL to indemnify HDDS for the cost overruns identified in the COPD — asserting, among other things, that the indemnification clause is limited to costs proximately caused by WAL's own negligent or willful misconduct, that the raw-material escalation costs constitute a force-majeure event excluded from the indemnity, and that the rework costs were caused by deficiencies in HDDS-supplied engineering specifications rather than by any deficiency in WAL's performance.

HDDS, represented by Leonard Trager, Partner, and Megan Forsythe, Senior Associate, of Voss, Trager & Kendall LLP ("VTK"), filed its Answer and Counterclaim on January 13, 2023. The Counterclaim seeks recovery from WAL in the amount of $14,726,583, plus attorneys' fees and costs of enforcement under Section 11.6 of the Teaming Agreement, which contains the prevailing-party attorneys' fees provision.

On February 10, 2023, WAL moved to stay the declaratory judgment action pending conclusion of the DCMA administrative review. The motion argued that the administrative proceeding, which would necessarily require DCMA to determine the quantum and causation of the cost overruns, implicated the primary-jurisdiction doctrine and that principles of judicial economy counseled in favor of allowing the expert agency to complete its work before the Court reached the contractual indemnity question. On February 24, 2023, the parties filed a joint stipulation in support of the stay, reflecting that HDDS did not oppose the request.

Judge Brannigan granted the stay on March 17, 2023. The Court's order, entered on the docket at ECF No. 24, rested on two independent grounds: first, the primary-jurisdiction doctrine, in recognition of DCMA's specialized expertise in evaluating defense-contract cost accounting and overrun causation; and second, judicial economy, noting that the COFD, once issued, would likely resolve or substantially narrow the disputed factual issues underlying the indemnity dispute. The stay order provides that it shall remain in effect until the earlier of (i) the issuance of a COFD by ACO Lt. Col. Vickers or (ii) further order of the Court. The order further requires that the parties file joint status reports at 120-day intervals, keeping the Court apprised of the progress of the administrative proceeding.

The first joint status report was filed on July 15, 2023 (ECF No. 27). The report stated that the DCMA field audit was ongoing, that no COFD had been issued, and that both parties requested the stay remain in effect. The Court took no further action following the filing.

C. Coordination with Ashford & Reeves LLP

WAL's government contracts regulatory counsel is Ashford & Reeves LLP, located at 2001 Pennsylvania Avenue NW, Suite 700, Washington, D.C. 20006. The primary attorneys at Ashford & Reeves working on this matter are Harold Reeves, Senior Partner, and Natalie Cheng, Associate.

The roles and responsibilities of the two law firms were formalized pursuant to a coordination protocol established by letter dated January 5, 2023, from Priya Anand to Harold Reeves. Under the protocol, Ashford & Reeves handles the regulatory and administrative interface with DCMA — including responding to audit requests, attending on-site audit sessions, coordinating the production of cost accounting records and other documentation, and communicating with DCMA representatives regarding the administrative review process. Calderwood & Harkness handles the declaratory judgment litigation in the Southern District of New York. The protocol provides for regular information sharing between the two firms, with particular attention to developments in the administrative proceeding that may have implications for the litigation posture, and vice versa.

The primary WAL contact for administrative matters is Catherine Soo-Hyun Park, Vice President, Government Contracts & Compliance. Ms. Park has served as WAL's principal point of contact with both Ashford & Reeves and DCMA throughout the course of the administrative review and has been instrumental in coordinating WAL's responses to DCMA's document requests and interview scheduling.

III. Current Status of the DCMA Field Audit

A. Information Received from Ashford & Reeves

On September 12, 2023, Natalie Cheng of Ashford & Reeves provided a verbal update to me by telephone regarding the current status of the DCMA administrative review under Prime Contract No. FA8620-19-C-0337. The verbal update was followed the same day by an email confirmation summarizing the key points discussed. Ms. Cheng's update was based on her communications with representatives of DCMA Northern Virginia, as well as on Ashford & Reeves's direct involvement in coordinating WAL's participation in the ongoing field audit activities during the summer of 2023.

The key points communicated by Ms. Cheng are set forth below and organized by subject matter.

B. Audit Phase

DCMA's field audit of the cost overruns identified in the August 1, 2022 COPD is still ongoing. The audit has not been completed, and no final audit report has been issued by the DCMA field audit team.

The field audit team has been conducting a comprehensive review of both HDDS's and WAL's cost accounting records, invoices, timesheets, labor distribution reports, and supporting documentation related to WP-4 and the other work packages implicated by the COPD. The scope of the audit is broad, encompassing all four principal cost-overrun categories identified in the COPD: (i) titanium raw-material cost escalation, (ii) rework costs attributable to non-conforming machining tolerances, (iii) idle-labor charges resulting from schedule delays, and (iv) engineering change proposal implementation costs. As Ms. Cheng noted, the audit team appears to be conducting a thorough, line-item-level review of the cost data, which is consistent with the magnitude of the identified overruns and the complexity of the underlying cost-accounting issues.

Ashford & Reeves understands that DCMA auditors have been physically on-site at both HDDS's headquarters at 1100 Garrison Boulevard, Suite 2200, Bethesda, Maryland 20817, and WAL's primary facility at 4200 Commerce Park Drive, Suite 600, Chantilly, Virginia 20151, during the summer of 2023. The on-site audit activities have included review of original-source documents maintained at both locations, as well as interviews of program personnel with knowledge of the cost-accounting practices, production processes, and scheduling decisions relevant to the overrun categories.

Catherine Soo-Hyun Park confirmed to Ashford & Reeves that WAL has cooperated fully and in a timely manner with all DCMA requests for documentation and personnel interviews. WAL has made available all records and personnel requested by the audit team, and there have been no disputes or delays in WAL's compliance with DCMA's information requests. This full cooperation posture is consistent with the approach recommended by Ashford & Reeves and endorsed by this firm and by WAL's management at the outset of the administrative review.

C. COFD Status

ACO Lt. Col. Sandra M. Vickers has not issued a Contracting Officer's Final Decision. Ms. Cheng confirmed that, as of September 12, 2023, no COFD has been transmitted to HDDS or to any other party.

More significantly, the COFD process has not yet commenced in any formal sense. According to Ms. Cheng, the field audit must be completed and the resulting cost analysis must be finalized before the matter can be forwarded for internal legal review at DCMA headquarters. Only after that internal legal review is completed would ACO Lt. Col. Vickers be in a position to issue a COFD. In other words, the administrative proceeding remains at the initial data-gathering stage, with multiple procedural steps remaining before a COFD could issue.

No timeline for completion of the field audit has been communicated by DCMA to either Ashford & Reeves or to WAL directly. Ms. Cheng indicated that she has inquired informally as to the expected timeline but has received no specific guidance from DCMA representatives. This is not unusual; DCMA field audits of this magnitude and complexity frequently take eighteen months to two years or longer from the date of the COPD, particularly where, as here, the audit involves multiple cost-overrun categories across more than one contractor's accounting systems.

HDDS's formal response and COFD request, filed on October 15, 2022, remains pending and has not been acted upon. To our knowledge, DCMA has not communicated any disposition of HDDS's request or provided HDDS with a timeline for the issuance of a COFD.

D. HDDS's Position in the Administrative Proceeding

Ashford & Reeves reports that HDDS continues to take the position before DCMA that all WP-4 cost overruns are attributable to WAL's performance under the Teaming Agreement and that WAL bears sole responsibility for the overruns in that work package. This position is consistent with the indemnification demand sent by HDDS to WAL on September 9, 2022, and with the Counterclaim asserted by HDDS in the DJ action.

In furtherance of this position, HDDS has submitted additional documentation to DCMA during the course of the field audit that purports to support its allocation of the cost overruns to WP-4 and, by extension, to WAL. Ms. Cheng did not have specific details regarding the nature or contents of HDDS's supplemental submissions, but indicated that Ashford & Reeves is monitoring this closely and will request access to any such submissions through appropriate channels to the extent permitted by the administrative process.

WAL, through Ashford & Reeves, has provided responsive submissions to DCMA that emphasize the causation issues central to the dispute. Specifically, WAL's submissions to DCMA have advanced three principal contentions:

(a) Titanium price escalation was a market-wide force-majeure event. WAL has presented data and analysis demonstrating that the significant escalation in titanium prices during the relevant performance period was driven by macroeconomic and geopolitical factors entirely beyond WAL's control, including supply-chain disruptions, export restrictions, and surging global demand. WAL contends that these costs should not be attributed to WAL's performance but rather should be treated as an equitable adjustment or cost-growth matter at the prime-contract level.

(b) Rework was attributable to deficiencies in HDDS-supplied engineering specifications. WAL has provided DCMA with technical documentation supporting its position that the non-conforming machining tolerances that gave rise to the rework costs were the result of ambiguities and errors in the engineering drawings and specifications provided by HDDS to WAL under the Teaming Agreement. WAL's machining processes were performed in accordance with the specifications as reasonably interpreted by WAL's engineering team, and the rework was required only because HDDS subsequently revised or clarified those specifications.

(c) Schedule delays resulted from HDDS's late delivery of government-furnished equipment ("GFE"). WAL has presented timeline analyses demonstrating that the schedule delays that caused the idle-labor charges were attributable to HDDS's failure to deliver GFE and other government-furnished material to WAL's facility on the dates specified in the integrated master schedule. WAL was unable to proceed with certain WP-4 production activities until the GFE was received, and the resulting idle time was a direct consequence of HDDS's delivery failures, not of any scheduling deficiency on WAL's part.

These causation arguments are consistent with the positions advanced by WAL in the DJ action and, if sustained in the DCMA administrative proceeding, would significantly undermine HDDS's indemnification claim.

IV. Implications for the DJ Action

A. Stay Remains Appropriate

The ongoing nature of the DCMA field audit confirms that the administrative proceeding is far from concluding. The audit team is still in the process of gathering and reviewing the underlying factual data, and multiple procedural steps — including finalization of the cost analysis, internal legal review at DCMA headquarters, and the issuance of a COFD — remain before the administrative process will yield a decision that could inform or resolve the indemnity dispute in the litigation.

The rationale for the March 17, 2023 stay order remains fully valid. Judge Brannigan's determination that the DCMA review would likely resolve or narrow the factual predicate for the indemnity dispute rests on the reasonable expectation that the COFD will provide an authoritative determination of the quantum and causation of the cost overruns — precisely the factual questions that would otherwise need to be litigated in the DJ action. Because those questions remain open and are actively being investigated by DCMA, there is no reason to disturb the stay.

Neither party has indicated any interest in lifting the stay. HDDS, through VTK, joined in the first joint status report filed on July 15, 2023, without objection to the continuation of the stay, and there is no indication that HDDS's position on this point has changed. From WAL's perspective, the stay continues to serve the client's interests by deferring the significant costs associated with active litigation while the administrative process plays out.

B. Next Joint Status Report

The second joint status report required under the stay order is due on or about November 12, 2023 — 120 days from the July 15, 2023 filing date of the first joint status report.

The content of the second report will be substantially similar to the first: the DCMA field audit continues, no COFD has been issued, and the parties jointly request that the Court maintain the stay in effect pending further developments in the administrative proceeding. The report should also note that the parties remain in communication regarding the status of the administrative review and that no change in circumstances warrants modification of the stay at this time.

Patrick Gallagher should initiate coordination with Megan Forsythe at Voss, Trager & Kendall LLP no later than October 15, 2023, to begin drafting and negotiating the joint language for the second status report. Based on our experience with the first report, the process should be straightforward, as both sides share an interest in maintaining the stay during the pendency of the administrative proceeding.

C. Potential Timeline Considerations

Given that the DCMA field audit remains in progress with no estimated completion date communicated by DCMA, it is reasonable to anticipate that the COFD may not issue until well into 2024, and potentially later. As noted above, DCMA field audits involving overruns of this magnitude and complexity routinely take eighteen months to two years or more from the date of the COPD. The August 1, 2022 COPD is now just over thirteen months old, and the field audit shows no signs of nearing completion.

An additional complicating factor is that the prime contract's base period of performance runs through August 31, 2024. Because the ATAP program is still active and production work is ongoing, the underlying cost data may continue to evolve during the remaining period of performance. This ongoing program activity may further complicate or delay the administrative review, as DCMA may need to account for cost developments that post-date the original COPD.

In the event that the administrative review extends significantly — for example, beyond the spring or summer of 2024 — the litigation team should discuss with WAL whether there is any strategic advantage to seeking to lift the stay and proceeding with the DJ action in advance of the COFD. At this time, however, there is no strategic advantage to doing so. The stay is saving WAL significant litigation costs, and the COFD, when it issues, will likely strengthen WAL's position in the DJ action by providing an authoritative factual basis that supports WAL's causation arguments. There is no reason to forgo these benefits prematurely.

V. Insurance and Financial Reporting Considerations

There has been no change in the insurance coverage posture since the last comprehensive update circulated to the team. Meridian Surety & Insurance Group has not issued a definitive coverage determination since its November 1, 2022 reservation-of-rights letter. That letter reserved Meridian's rights with respect to the potential applicability of the contractual-liability exclusion and the government-contract exclusion under WAL's Directors & Officers Liability Policy No. MSI-DO-2022-07814 and Commercial General Liability Policy No. MSI-CGL-2021-33291. A follow-up letter was sent to Meridian on March 10, 2023, requesting that Meridian advance its coverage analysis and provide a substantive coverage position. As of the date of this memorandum, no substantive response has been received from Meridian. The lack of engagement from the carrier is a concern that will need to be addressed, as discussed in Section VI below.

On the financial reporting front, Pinnacle Advisory Partners LLC completed its audit of WAL's FY 2022 financial statements on April 14, 2023. In connection with that audit, Pinnacle treated the HDDS indemnity contingency as "reasonably possible" but not "probable" under Accounting Standards Codification ("ASC") 450, Contingencies. The FY 2022 financial statements include footnote disclosure of a contingent liability of up to $14.7 million but do not include any balance-sheet accrual for the contingency. This treatment reflects the auditors' assessment — informed in part by input from this firm and from Ashford & Reeves — that, given the disputed causation issues and the early stage of the administrative review, the likelihood that WAL will ultimately be required to pay the full indemnity demand (or any portion of it) cannot be assessed as "probable" at this time. This accounting treatment is expected to continue for FY 2023 absent a material change in circumstances, such as the issuance of a COFD unfavorable to WAL or a significant adverse development in the litigation.

WAL's $75 million senior secured revolving credit facility with Ridgeline National Bank, N.A., remains in good standing. As of the most recent draw date, $31.2 million is currently outstanding under the facility. WAL is not in default under any provision of the credit agreement. The required litigation-related notices under Section 6.07(b) of the credit agreement were timely delivered on September 28, 2022, following the filing of the HDDS indemnification demand, and again on December 5, 2022, following the filing of the DJ action. No further Section 6.07(b) notices have been required, and Ridgeline National Bank has not raised any concerns or inquiries regarding the pending dispute.

VI. Recommended Next Steps

Based on the current status of the DCMA field audit and the DJ action, the following next steps are recommended:

1. Continue monitoring the DCMA field audit. Ashford & Reeves LLP should continue to serve as the primary monitoring channel for developments in the administrative proceeding, consistent with the established coordination protocol. I recommend that we request Natalie Cheng provide updates to us on at least a monthly basis going forward, even if there are no material developments, to ensure that we maintain a current understanding of the audit's progress and can respond promptly if circumstances change.

2. Prepare the second joint status report. The second joint status report is due for filing on or about November 12, 2023. Patrick Gallagher should take the lead in coordinating with Megan Forsythe at Voss, Trager & Kendall LLP to draft and finalize the joint report. I recommend initiating that coordination no later than October 15, 2023, to allow adequate time for review and approval by both sides.

3. No litigation action required at this time. There is no action required on the DJ action at this time. The stay remains in effect, no motions or filings are pending or contemplated, and no deadlines are approaching other than the joint status report. WAL should maintain the litigation hold and document preservation protocols that were put in place at the inception of the dispute, and Ashford & Reeves should continue to ensure that documents produced or generated in connection with the DCMA audit are preserved in accordance with those protocols.

4. Follow up with Meridian Surety & Insurance Group. If no substantive response to the March 10, 2023 follow-up letter is received from Meridian by year-end 2023, I recommend that the team consider a more formal demand for a coverage determination, directed to Rachel Underwood at Meridian or, if necessary, to Meridian's coverage counsel. The prolonged silence from the carrier is not acceptable, and WAL is entitled to a definitive coverage position to inform its financial planning and risk assessment.

5. Circulate this memorandum to WAL's General Counsel. Subject to privilege considerations, this memorandum should be circulated to Gregory Poole, General Counsel at Whitmore Aerospace LLC, for his information. Priya or Douglas should confirm that such circulation is appropriate and that WAL's internal distribution will be limited so as not to waive any applicable privilege.

VII. Fees and Budget Note

Total fees incurred by Calderwood & Harkness through the current billing period remain well within the dormancy-period monitoring estimate established in the revised litigation budget. The reduced activity level during the pendency of the stay is consistent with the projections provided by Douglas Carmichael in the revised litigation budget memorandum dated April 15, 2023, which contemplated minimal activity during the stay period, limited primarily to monitoring the administrative proceeding, coordinating with Ashford & Reeves, and preparing periodic joint status reports.

Phase-specific monitoring costs — including time incurred for status reports, coordination with Ashford & Reeves, internal team communications, and client updates — are tracking as expected. No budget adjustments are recommended at this time. Should the stay remain in effect through 2024, as appears likely, the team should revisit the budget in the first quarter of 2024 to confirm that the monitoring-phase projections remain appropriate.

VIII. Conclusion

In summary, the DCMA field audit under Prime Contract No. FA8620-19-C-0337 remains in progress. No Contracting Officer's Final Decision has been issued, and the administrative review shows no signs of concluding in the near term. The stay of the declaratory judgment action entered by Judge Brannigan on March 17, 2023, is functioning as intended, and there is no basis to seek to lift or modify the stay at this time. No immediate action is required beyond routine monitoring of the administrative proceeding, coordination with Ashford & Reeves, and preparation of the second joint status report due on or about November 12, 2023.

I am available to discuss any aspect of this memorandum at your convenience. Please let me know if you would like me to schedule a call with Natalie Cheng or with Catherine Soo-Hyun Park to discuss the audit status in further detail.

Distribution: Internal to Calderwood & Harkness LLP litigation team only — Priya Anand, Douglas Carmichael, Patrick Gallagher.

Privilege Designation: This memorandum is protected by the attorney-client privilege and constitutes attorney work product prepared in anticipation of litigation. It contains the mental impressions, conclusions, opinions, and legal theories of attorneys at Calderwood & Harkness LLP. Do not distribute outside the firm without express Partner authorization.

FROM:

Calderwood & Harkness LLP

1900 K Street NW, Suite 1100

Washington, D.C. 20006

TO:

Douglas Carmichael, Partner

Patrick Gallagher, Associate

Calderwood & Harkness LLP

600 Lexington Avenue, 28th Floor

New York, NY 10022

DATE:	September 15, 2023
RE:	Update on DCMA Field Audit Status — Prime Contract No. FA8620-19-C-0337 (Advanced Tactical Airframe Program)
MATTER:	Whitmore Aerospace LLC v. Hargrove-Dalton Defense Systems, Inc., No. 1:22-cv-10147-RMB (S.D.N.Y.)
CLIENT:	Whitmore Aerospace LLC

PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
INTERNAL MEMORANDUM
I. Purpose and Summary
The purpose of this memorandum is to summarize information received from Ashford & Reeves LLP — specifically, from Harold Reeves, Senior Partner, and Natalie Cheng, Associate — regarding the current status of the Defense Contract Management Agency ("DCMA") field audit being conducted under Prime Contract No. FA8620-19-C-0337, as that audit pertains to the cost overruns identified in the August 1, 2022 Contracting Officer's Preliminary Determination ("COPD") and the pending indemnification dispute between our client, Whitmore Aerospace LLC ("WAL"), and Hargrove-Dalton Defense Systems, Inc. ("HDDS").
Bottom line: The DCMA field audit remains ongoing. No Contracting Officer's Final Decision ("COFD") has been issued by Administrative Contracting Officer ("ACO") Lt. Col. Sandra M. Vickers, USAF, stationed at DCMA Northern Virginia. The administrative review remains squarely in its fact-gathering and audit phase, with no indication from DCMA as to when the field audit will conclude or when a COFD might be forthcoming.
This status carries several implications for the pending declaratory judgment action before Judge Brannigan in the Southern District of New York. Most significantly, the stay entered by the Honorable Richard M. Brannigan on March 17, 2023, remains appropriate and well-founded. There is no basis, strategic or otherwise, for either party to seek to lift or modify the stay at this time. The underlying administrative proceeding — the resolution of which the Court correctly recognized would likely resolve or substantially narrow the factual predicate for the indemnity dispute — has not progressed to a point at which action in the litigation would serve any purpose.
The next joint status report required under the Court's stay order is due on or about November 12, 2023, which is 120 days from the date of the first joint status report filed on July 15, 2023. Patrick Gallagher should begin coordinating with opposing counsel in the coming weeks to prepare that filing.
II. Background
A. The Underlying Dispute
On August 1, 2022, DCMA issued a Contracting Officer's Preliminary Determination ("COPD") identifying aggregate cost overruns of $14,726,583 on the Advanced Tactical Airframe Program ("ATAP"), a major defense acquisition program managed under Prime Contract No. FA8620-19-C-0337 between HDDS, as the prime contractor, and the United States Air Force.
The COPD attributed $12,817,441 of the total cost overruns — representing approximately 87.03% — to Work Package 4 ("WP-4"), which encompasses the titanium structural assembly work package. WP-4 is the scope of work performed by WAL in its capacity as subcontractor and teaming partner to HDDS under the Teaming Agreement executed by the parties on June 12, 2019. The remaining $1,909,142, or approximately 12.97% of the identified overruns, was attributed by DCMA to other work packages under the prime contract for which HDDS bears direct performance responsibility.
The COPD's narrative section broke down the WP-4 overrun components into four principal categories:
(a) Titanium raw-material cost escalation — approximately $4.2 million, reflecting a significant increase in the market price of aerospace-grade titanium alloys during the relevant performance period, driven in large part by supply-chain disruptions and geopolitical factors;
(b) Rework costs due to non-conforming machining tolerances — approximately $5.1 million, arising from alleged deviations from engineering specifications in the machining of titanium structural components, which HDDS contends necessitated substantial rework at WAL's Chantilly facility;
(c) Schedule delays causing idle-labor charges — approximately $2.3 million, attributed to delays in the WP-4 production timeline that resulted in billable but unproductive labor hours for personnel assigned to the program; and
(d) Engineering change proposal ("ECP") implementation costs — approximately $1.2 million, associated with the incorporation of government-directed engineering changes into the WP-4 work scope.
On September 9, 2022, HDDS transmitted to WAL a formal indemnification demand for the full $14,726,583 in identified cost overruns. The demand letter, signed by HDDS's General Counsel, invoked Section 11.4 of the Teaming Agreement, which contains the indemnification provision at the center of this dispute. Notably, the demand was for the entire $14,726,583, not merely the $12,817,441 attributed specifically to WP-4 in the COPD — a point that WAL has consistently contested as overreaching, given that a meaningful portion of the overruns was attributed to work packages outside WAL's scope.
On October 15, 2022, HDDS filed a formal response to the COPD together with a request that ACO Lt. Col. Vickers issue a Contracting Officer's Final Decision under the Contract Disputes Act, 41 U.S.C. § 7103. That request remains pending, and no COFD has been issued to date.
B. The DJ Action and Stay
On November 28, 2022, WAL, through this firm, filed a Verified Complaint for Declaratory Judgment in the United States District Court for the Southern District of New York, initiating the action captioned Whitmore Aerospace LLC v. Hargrove-Dalton Defense Systems, Inc., Case No. 1:22-cv-10147-RMB. The Complaint was assigned to the Honorable Richard M. Brannigan, United States District Judge. The Complaint seeks declarations that Section 11.4 of the Teaming Agreement does not obligate WAL to indemnify HDDS for the cost overruns identified in the COPD — asserting, among other things, that the indemnification clause is limited to costs proximately caused by WAL's own negligent or willful misconduct, that the raw-material escalation costs constitute a force-majeure event excluded from the indemnity, and that the rework costs were caused by deficiencies in HDDS-supplied engineering specifications rather than by any deficiency in WAL's performance.
HDDS, represented by Leonard Trager, Partner, and Megan Forsythe, Senior Associate, of Voss, Trager & Kendall LLP ("VTK"), filed its Answer and Counterclaim on January 13, 2023. The Counterclaim seeks recovery from WAL in the amount of $14,726,583, plus attorneys' fees and costs of enforcement under Section 11.6 of the Teaming Agreement, which contains the prevailing-party attorneys' fees provision.
On February 10, 2023, WAL moved to stay the declaratory judgment action pending conclusion of the DCMA administrative review. The motion argued that the administrative proceeding, which would necessarily require DCMA to determine the quantum and causation of the cost overruns, implicated the primary-jurisdiction doctrine and that principles of judicial economy counseled in favor of allowing the expert agency to complete its work before the Court reached the contractual indemnity question. On February 24, 2023, the parties filed a joint stipulation in support of the stay, reflecting that HDDS did not oppose the request.
Judge Brannigan granted the stay on March 17, 2023. The Court's order, entered on the docket at ECF No. 24, rested on two independent grounds: first, the primary-jurisdiction doctrine, in recognition of DCMA's specialized expertise in evaluating defense-contract cost accounting and overrun causation; and second, judicial economy, noting that the COFD, once issued, would likely resolve or substantially narrow the disputed factual issues underlying the indemnity dispute. The stay order provides that it shall remain in effect until the earlier of (i) the issuance of a COFD by ACO Lt. Col. Vickers or (ii) further order of the Court. The order further requires that the parties file joint status reports at 120-day intervals, keeping the Court apprised of the progress of the administrative proceeding.
The first joint status report was filed on July 15, 2023 (ECF No. 27). The report stated that the DCMA field audit was ongoing, that no COFD had been issued, and that both parties requested the stay remain in effect. The Court took no further action following the filing.
C. Coordination with Ashford & Reeves LLP
WAL's government contracts regulatory counsel is Ashford & Reeves LLP, located at 2001 Pennsylvania Avenue NW, Suite 700, Washington, D.C. 20006. The primary attorneys at Ashford & Reeves working on this matter are Harold Reeves, Senior Partner, and Natalie Cheng, Associate.
The roles and responsibilities of the two law firms were formalized pursuant to a coordination protocol established by letter dated January 5, 2023, from Priya Anand to Harold Reeves. Under the protocol, Ashford & Reeves handles the regulatory and administrative interface with DCMA — including responding to audit requests, attending on-site audit sessions, coordinating the production of cost accounting records and other documentation, and communicating with DCMA representatives regarding the administrative review process. Calderwood & Harkness handles the declaratory judgment litigation in the Southern District of New York. The protocol provides for regular information sharing between the two firms, with particular attention to developments in the administrative proceeding that may have implications for the litigation posture, and vice versa.
The primary WAL contact for administrative matters is Catherine Soo-Hyun Park, Vice President, Government Contracts & Compliance. Ms. Park has served as WAL's principal point of contact with both Ashford & Reeves and DCMA throughout the course of the administrative review and has been instrumental in coordinating WAL's responses to DCMA's document requests and interview scheduling.
III. Current Status of the DCMA Field Audit
A. Information Received from Ashford & Reeves
On September 12, 2023, Natalie Cheng of Ashford & Reeves provided a verbal update to me by telephone regarding the current status of the DCMA administrative review under Prime Contract No. FA8620-19-C-0337. The verbal update was followed the same day by an email confirmation summarizing the key points discussed. Ms. Cheng's update was based on her communications with representatives of DCMA Northern Virginia, as well as on Ashford & Reeves's direct involvement in coordinating WAL's participation in the ongoing field audit activities during the summer of 2023.
The key points communicated by Ms. Cheng are set forth below and organized by subject matter.
B. Audit Phase
DCMA's field audit of the cost overruns identified in the August 1, 2022 COPD is still ongoing. The audit has not been completed, and no final audit report has been issued by the DCMA field audit team.
The field audit team has been conducting a comprehensive review of both HDDS's and WAL's cost accounting records, invoices, timesheets, labor distribution reports, and supporting documentation related to WP-4 and the other work packages implicated by the COPD. The scope of the audit is broad, encompassing all four principal cost-overrun categories identified in the COPD: (i) titanium raw-material cost escalation, (ii) rework costs attributable to non-conforming machining tolerances, (iii) idle-labor charges resulting from schedule delays, and (iv) engineering change proposal implementation costs. As Ms. Cheng noted, the audit team appears to be conducting a thorough, line-item-level review of the cost data, which is consistent with the magnitude of the identified overruns and the complexity of the underlying cost-accounting issues.
Ashford & Reeves understands that DCMA auditors have been physically on-site at both HDDS's headquarters at 1100 Garrison Boulevard, Suite 2200, Bethesda, Maryland 20817, and WAL's primary facility at 4200 Commerce Park Drive, Suite 600, Chantilly, Virginia 20151, during the summer of 2023. The on-site audit activities have included review of original-source documents maintained at both locations, as well as interviews of program personnel with knowledge of the cost-accounting practices, production processes, and scheduling decisions relevant to the overrun categories.
Catherine Soo-Hyun Park confirmed to Ashford & Reeves that WAL has cooperated fully and in a timely manner with all DCMA requests for documentation and personnel interviews. WAL has made available all records and personnel requested by the audit team, and there have been no disputes or delays in WAL's compliance with DCMA's information requests. This full cooperation posture is consistent with the approach recommended by Ashford & Reeves and endorsed by this firm and by WAL's management at the outset of the administrative review.
C. COFD Status
ACO Lt. Col. Sandra M. Vickers has not issued a Contracting Officer's Final Decision. Ms. Cheng confirmed that, as of September 12, 2023, no COFD has been transmitted to HDDS or to any other party.
More significantly, the COFD process has not yet commenced in any formal sense. According to Ms. Cheng, the field audit must be completed and the resulting cost analysis must be finalized before the matter can be forwarded for internal legal review at DCMA headquarters. Only after that internal legal review is completed would ACO Lt. Col. Vickers be in a position to issue a COFD. In other words, the administrative proceeding remains at the initial data-gathering stage, with multiple procedural steps remaining before a COFD could issue.
No timeline for completion of the field audit has been communicated by DCMA to either Ashford & Reeves or to WAL directly. Ms. Cheng indicated that she has inquired informally as to the expected timeline but has received no specific guidance from DCMA representatives. This is not unusual; DCMA field audits of this magnitude and complexity frequently take eighteen months to two years or longer from the date of the COPD, particularly where, as here, the audit involves multiple cost-overrun categories across more than one contractor's accounting systems.
HDDS's formal response and COFD request, filed on October 15, 2022, remains pending and has not been acted upon. To our knowledge, DCMA has not communicated any disposition of HDDS's request or provided HDDS with a timeline for the issuance of a COFD.
D. HDDS's Position in the Administrative Proceeding
Ashford & Reeves reports that HDDS continues to take the position before DCMA that all WP-4 cost overruns are attributable to WAL's performance under the Teaming Agreement and that WAL bears sole responsibility for the overruns in that work package. This position is consistent with the indemnification demand sent by HDDS to WAL on September 9, 2022, and with the Counterclaim asserted by HDDS in the DJ action.
In furtherance of this position, HDDS has submitted additional documentation to DCMA during the course of the field audit that purports to support its allocation of the cost overruns to WP-4 and, by extension, to WAL. Ms. Cheng did not have specific details regarding the nature or contents of HDDS's supplemental submissions, but indicated that Ashford & Reeves is monitoring this closely and will request access to any such submissions through appropriate channels to the extent permitted by the administrative process.
WAL, through Ashford & Reeves, has provided responsive submissions to DCMA that emphasize the causation issues central to the dispute. Specifically, WAL's submissions to DCMA have advanced three principal contentions:
(a) Titanium price escalation was a market-wide force-majeure event. WAL has presented data and analysis demonstrating that the significant escalation in titanium prices during the relevant performance period was driven by macroeconomic and geopolitical factors entirely beyond WAL's control, including supply-chain disruptions, export restrictions, and surging global demand. WAL contends that these costs should not be attributed to WAL's performance but rather should be treated as an equitable adjustment or cost-growth matter at the prime-contract level.
(b) Rework was attributable to deficiencies in HDDS-supplied engineering specifications. WAL has provided DCMA with technical documentation supporting its position that the non-conforming machining tolerances that gave rise to the rework costs were the result of ambiguities and errors in the engineering drawings and specifications provided by HDDS to WAL under the Teaming Agreement. WAL's machining processes were performed in accordance with the specifications as reasonably interpreted by WAL's engineering team, and the rework was required only because HDDS subsequently revised or clarified those specifications.
(c) Schedule delays resulted from HDDS's late delivery of government-furnished equipment ("GFE"). WAL has presented timeline analyses demonstrating that the schedule delays that caused the idle-labor charges were attributable to HDDS's failure to deliver GFE and other government-furnished material to WAL's facility on the dates specified in the integrated master schedule. WAL was unable to proceed with certain WP-4 production activities until the GFE was received, and the resulting idle time was a direct consequence of HDDS's delivery failures, not of any scheduling deficiency on WAL's part.
These causation arguments are consistent with the positions advanced by WAL in the DJ action and, if sustained in the DCMA administrative proceeding, would significantly undermine HDDS's indemnification claim.
IV. Implications for the DJ Action
A. Stay Remains Appropriate
The ongoing nature of the DCMA field audit confirms that the administrative proceeding is far from concluding. The audit team is still in the process of gathering and reviewing the underlying factual data, and multiple procedural steps — including finalization of the cost analysis, internal legal review at DCMA headquarters, and the issuance of a COFD — remain before the administrative process will yield a decision that could inform or resolve the indemnity dispute in the litigation.
The rationale for the March 17, 2023 stay order remains fully valid. Judge Brannigan's determination that the DCMA review would likely resolve or narrow the factual predicate for the indemnity dispute rests on the reasonable expectation that the COFD will provide an authoritative determination of the quantum and causation of the cost overruns — precisely the factual questions that would otherwise need to be litigated in the DJ action. Because those questions remain open and are actively being investigated by DCMA, there is no reason to disturb the stay.
Neither party has indicated any interest in lifting the stay. HDDS, through VTK, joined in the first joint status report filed on July 15, 2023, without objection to the continuation of the stay, and there is no indication that HDDS's position on this point has changed. From WAL's perspective, the stay continues to serve the client's interests by deferring the significant costs associated with active litigation while the administrative process plays out.
B. Next Joint Status Report
The second joint status report required under the stay order is due on or about November 12, 2023 — 120 days from the July 15, 2023 filing date of the first joint status report.
The content of the second report will be substantially similar to the first: the DCMA field audit continues, no COFD has been issued, and the parties jointly request that the Court maintain the stay in effect pending further developments in the administrative proceeding. The report should also note that the parties remain in communication regarding the status of the administrative review and that no change in circumstances warrants modification of the stay at this time.
Patrick Gallagher should initiate coordination with Megan Forsythe at Voss, Trager & Kendall LLP no later than October 15, 2023, to begin drafting and negotiating the joint language for the second status report. Based on our experience with the first report, the process should be straightforward, as both sides share an interest in maintaining the stay during the pendency of the administrative proceeding.
C. Potential Timeline Considerations
Given that the DCMA field audit remains in progress with no estimated completion date communicated by DCMA, it is reasonable to anticipate that the COFD may not issue until well into 2024, and potentially later. As noted above, DCMA field audits involving overruns of this magnitude and complexity routinely take eighteen months to two years or more from the date of the COPD. The August 1, 2022 COPD is now just over thirteen months old, and the field audit shows no signs of nearing completion.
An additional complicating factor is that the prime contract's base period of performance runs through August 31, 2024. Because the ATAP program is still active and production work is ongoing, the underlying cost data may continue to evolve during the remaining period of performance. This ongoing program activity may further complicate or delay the administrative review, as DCMA may need to account for cost developments that post-date the original COPD.
In the event that the administrative review extends significantly — for example, beyond the spring or summer of 2024 — the litigation team should discuss with WAL whether there is any strategic advantage to seeking to lift the stay and proceeding with the DJ action in advance of the COFD. At this time, however, there is no strategic advantage to doing so. The stay is saving WAL significant litigation costs, and the COFD, when it issues, will likely strengthen WAL's position in the DJ action by providing an authoritative factual basis that supports WAL's causation arguments. There is no reason to forgo these benefits prematurely.
V. Insurance and Financial Reporting Considerations
There has been no change in the insurance coverage posture since the last comprehensive update circulated to the team. Meridian Surety & Insurance Group has not issued a definitive coverage determination since its November 1, 2022 reservation-of-rights letter. That letter reserved Meridian's rights with respect to the potential applicability of the contractual-liability exclusion and the government-contract exclusion under WAL's Directors & Officers Liability Policy No. MSI-DO-2022-07814 and Commercial General Liability Policy No. MSI-CGL-2021-33291. A follow-up letter was sent to Meridian on March 10, 2023, requesting that Meridian advance its coverage analysis and provide a substantive coverage position. As of the date of this memorandum, no substantive response has been received from Meridian. The lack of engagement from the carrier is a concern that will need to be addressed, as discussed in Section VI below.
On the financial reporting front, Pinnacle Advisory Partners LLC completed its audit of WAL's FY 2022 financial statements on April 14, 2023. In connection with that audit, Pinnacle treated the HDDS indemnity contingency as "reasonably possible" but not "probable" under Accounting Standards Codification ("ASC") 450, Contingencies. The FY 2022 financial statements include footnote disclosure of a contingent liability of up to $14.7 million but do not include any balance-sheet accrual for the contingency. This treatment reflects the auditors' assessment — informed in part by input from this firm and from Ashford & Reeves — that, given the disputed causation issues and the early stage of the administrative review, the likelihood that WAL will ultimately be required to pay the full indemnity demand (or any portion of it) cannot be assessed as "probable" at this time. This accounting treatment is expected to continue for FY 2023 absent a material change in circumstances, such as the issuance of a COFD unfavorable to WAL or a significant adverse development in the litigation.
WAL's $75 million senior secured revolving credit facility with Ridgeline National Bank, N.A., remains in good standing. As of the most recent draw date, $31.2 million is currently outstanding under the facility. WAL is not in default under any provision of the credit agreement. The required litigation-related notices under Section 6.07(b) of the credit agreement were timely delivered on September 28, 2022, following the filing of the HDDS indemnification demand, and again on December 5, 2022, following the filing of the DJ action. No further Section 6.07(b) notices have been required, and Ridgeline National Bank has not raised any concerns or inquiries regarding the pending dispute.
VI. Recommended Next Steps
Based on the current status of the DCMA field audit and the DJ action, the following next steps are recommended:
1. Continue monitoring the DCMA field audit. Ashford & Reeves LLP should continue to serve as the primary monitoring channel for developments in the administrative proceeding, consistent with the established coordination protocol. I recommend that we request Natalie Cheng provide updates to us on at least a monthly basis going forward, even if there are no material developments, to ensure that we maintain a current understanding of the audit's progress and can respond promptly if circumstances change.
2. Prepare the second joint status report. The second joint status report is due for filing on or about November 12, 2023. Patrick Gallagher should take the lead in coordinating with Megan Forsythe at Voss, Trager & Kendall LLP to draft and finalize the joint report. I recommend initiating that coordination no later than October 15, 2023, to allow adequate time for review and approval by both sides.
3. No litigation action required at this time. There is no action required on the DJ action at this time. The stay remains in effect, no motions or filings are pending or contemplated, and no deadlines are approaching other than the joint status report. WAL should maintain the litigation hold and document preservation protocols that were put in place at the inception of the dispute, and Ashford & Reeves should continue to ensure that documents produced or generated in connection with the DCMA audit are preserved in accordance with those protocols.
4. Follow up with Meridian Surety & Insurance Group. If no substantive response to the March 10, 2023 follow-up letter is received from Meridian by year-end 2023, I recommend that the team consider a more formal demand for a coverage determination, directed to Rachel Underwood at Meridian or, if necessary, to Meridian's coverage counsel. The prolonged silence from the carrier is not acceptable, and WAL is entitled to a definitive coverage position to inform its financial planning and risk assessment.
5. Circulate this memorandum to WAL's General Counsel. Subject to privilege considerations, this memorandum should be circulated to Gregory Poole, General Counsel at Whitmore Aerospace LLC, for his information. Priya or Douglas should confirm that such circulation is appropriate and that WAL's internal distribution will be limited so as not to waive any applicable privilege.
VII. Fees and Budget Note
Total fees incurred by Calderwood & Harkness through the current billing period remain well within the dormancy-period monitoring estimate established in the revised litigation budget. The reduced activity level during the pendency of the stay is consistent with the projections provided by Douglas Carmichael in the revised litigation budget memorandum dated April 15, 2023, which contemplated minimal activity during the stay period, limited primarily to monitoring the administrative proceeding, coordinating with Ashford & Reeves, and preparing periodic joint status reports.
Phase-specific monitoring costs — including time incurred for status reports, coordination with Ashford & Reeves, internal team communications, and client updates — are tracking as expected. No budget adjustments are recommended at this time. Should the stay remain in effect through 2024, as appears likely, the team should revisit the budget in the first quarter of 2024 to confirm that the monitoring-phase projections remain appropriate.
VIII. Conclusion
In summary, the DCMA field audit under Prime Contract No. FA8620-19-C-0337 remains in progress. No Contracting Officer's Final Decision has been issued, and the administrative review shows no signs of concluding in the near term. The stay of the declaratory judgment action entered by Judge Brannigan on March 17, 2023, is functioning as intended, and there is no basis to seek to lift or modify the stay at this time. No immediate action is required beyond routine monitoring of the administrative proceeding, coordination with Ashford & Reeves, and preparation of the second joint status report due on or about November 12, 2023.
I am available to discuss any aspect of this memorandum at your convenience. Please let me know if you would like me to schedule a call with Natalie Cheng or with Catherine Soo-Hyun Park to discuss the audit status in further detail.
Distribution: Internal to Calderwood & Harkness LLP litigation team only — Priya Anand, Douglas Carmichael, Patrick Gallagher.
Privilege Designation: This memorandum is protected by the attorney-client privilege and constitutes attorney work product prepared in anticipation of litigation. It contains the mental impressions, conclusions, opinions, and legal theories of attorneys at Calderwood & Harkness LLP. Do not distribute outside the firm without express Partner authorization.
FROM: | Simone Laroche, Associate
Calderwood & Harkness LLP
1900 K Street NW, Suite 1100
Washington, D.C. 20006
TO: | Priya Anand, Partner
Douglas Carmichael, Partner
Patrick Gallagher, Associate
Calderwood & Harkness LLP
600 Lexington Avenue, 28th Floor
New York, NY 10022
DATE: | September 15, 2023
RE: | Update on DCMA Field Audit Status — Prime Contract No. FA8620-19-C-0337 (Advanced Tactical Airframe Program)
MATTER: | Whitmore Aerospace LLC v. Hargrove-Dalton Defense Systems, Inc., No. 1:22-cv-10147-RMB (S.D.N.Y.)
CLIENT: | Whitmore Aerospace LLC

PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT

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