Government Contracts Wrap Rate and Incentive Fee Information Exempt Under FOIA
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Monday, October 22, 2018

Wrap Rate and Incentive Fee Information Exempt Under FOIA

By Government Contracts Editorial Staff

The District Court for the District of Columbia resolved cross-motions for summary judgment on a reverse Freedom of Information Act suit in favor of the contractor because the government unreasonably concluded that the release of incentive fee and “wrap rate” information would not likely cause the contractor substantial competitive harm. The suit arose from a third-party FOIA request for a copy of a cost-reimbursement contract for the design and manufacture of the James Webb Space Telescope. The contractor objected to the release of two tables in the contract containing the calculation of a negative fee incentive and the contractor’s proposed wrap rates, consisting of three indirect cost components. After the government notified the contractor that the information was releasable under FOIA, the contractor filed suit alleging the decision was arbitrary and capricious. The issue before the court was whether the information to be released was “privileged or confidential” under FOIA Exemption 4 (5 USC 552(b)(4)).

Flawed Decision. The government gave six reasons in support of its decision to release the tables, but none of them withstood scrutiny under the Administrative Procedure Act. The first two rationales—that the contractor’s actual rates were not being disclosed, and that those rates could not be derived from the proposed wrap rates—were flawed because the contractor’s competitors could use the proposed rates to undercut future bids. Although the wrap rates were only proposed rates, they were connected to the contractor’s actual rates. For each contract year, the contractor was required to apply the proposed wrap rate to its actual labor costs, and to avoid the negative fee incentive, the contractor needed to insure the proposed wrap rate was predictive of its actual wrap rate. Further, even if competitors could not extrapolate the contractor’s actual rates, the proposed wrap rates were proprietary information that the contractor treated as “closely held” and did not share with competitors. The government’s third rationale, which contested the contractor’s claim of trade secret status, was “equally flawed.”

Contractor’s Concerns Rejected. For its fourth rationale, the government maintained the contract was a unique, “once in a generation” contract and releasing the wrap rates would not confer an advantage in a future contract for a space-based observatory, but this conclusion failed to consider the contractor’s statement that releasing the rates would put it at a competitive disadvantage in bidding on a range of specific aerospace solicitations. The government’s fifth rationale—that wrap rate information was “only one aspect of a myriad number of fluctuating variables relevant to a future contract award”—ignored the fact that the rates were an important component of price under the cost-plus contract and that competitors could use the information in future procurements. Finally, the government reasoned release of the wrap rates would not cause competitive harm because they were inserted 15 years earlier at contract formation, never updated, and were therefore “not current.” However, there was no reason to doubt the contractor’s assertion that competitors could still use the information to undercut the contractor in future solicitations, and the government did not offer any reasoned basis for rejecting the contractor’s representations. (Northrop Grumman Systems Corp. v. NASA, DC DofC, 62 CCF ¶81,489)

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