_______________________________________________ GRANTED: August 7, 1995 _______________________________________________ GSBCA 13101 BAKER SCHOOL SPECIALTY CO., INC., Appellant, v. GENERAL SERVICES ADMINISTRATION, Respondent. David Logan and Missy Garmon of Baker School Specialty Co., Inc., Orange, MA, appearing for Appellant. David L. Frecker, Office of General Counsel, General Services Administration, Washington, DC, counsel for Respondent. Before Board Judges NEILL, WILLIAMS, and GOODMAN. NEILL, Board Judge. In this case, appellant, Baker School Specialty Co. Inc. (Baker), appeals a contracting officer's decision claiming a refund of $36,614 and revising contract prices based on audit findings that pricing data submitted by appellant was incomplete. Baker contends that the failure to disclose information on certain discounts granted to other customers during and after negotiation of its contract with the Government was purely inadvertent. Baker also contends that, in the aggregate, the discounts offered to the Government represent a greater savings for the Government than the non-disclosed discounts represent for favored customers to whom they were given. Finally, Baker contends that the price reductions demanded by respondent for the balance of the contract period unfairly penalize the contractor for this allegedly inadvertent failure to disclose insignificant pricing data. For the reasons set out below, we grant the appeal. Findings of Fact I. The Solicitation The contract under which this dispute arises resulted from a solicitation issued by the General Services Administration (GSA) for proposals to enter into Federal Supply Schedule contracts for the supply of display and communication boards. Appeal File, Exhibit 1. The solicitation identified various categories of display and communication boards under seven different special item numbers. It envisioned the negotiation of prices based on discounts from a vendor's established catalog or market price for the various items offered. Offerors were required to provide certified pricing data for purposes of negotiation. Id. at 90. The certification to be provided by each offeror was to represent that the data submitted with its proposal were "accurate, complete, and current representations of actual transactions to the date when price negotiations are concluded." Appeal File, Exhibit 1 at 90. The discount schedule and marketing data (DSMD) instructions provided with the solicitation directed offerors to submit schedules for each special item number. Offerors were to include on these schedules information: (i) on sales to the Federal Government and to non-government customers over the prior twelve months, (ii) on the largest discount offered to any non- government customers for that item, and (iii) on the largest discount offered for commercial sales of quantities comparable to those sold to the Federal Government. Appeal File, Exhibit 1 at 100. The solicitation contains two provisions of special relevance to this appeal. The first is entitled: "PRICE REDUCTION." This provision states that throughout the term of the contract, the Government shall maintain its relative price/discount advantage in relation to the contractor's commercial customers or category of customers upon which the contract award was predicated. This clause provides that the customer or category of customers in question will be identified at the close of negotiations. The clause likewise provides that "[a]ny change in the contractor's commercial pricing arrangement for that customer or category of customers which disturbs this relationship will constitute a price reduction." Appeal File, Exhibit 1 at 58. The second solicitation provision of special relevance to this appeal is the clause entitled "BASIS FOR PRICE NEGOTIATION." It reads in part: (d) Price Reduction for Defective Pricing Data. If subsequent to the award of any contract resulting from this solicitation it is found that any price negotiated in connection with this contract was increased by any significant amount because the prices, data, and facts were not as stated in the offeror's "Certificate of Established Catalog or Market Price," then the contract price(s) shall be reduced by such amount and the contract shall be modified in writing to reflect such adjustment. Appeal File, Exhibit 1 at 91. II. Baker's Proposal In its proposal, Baker offered prices based on a price list of September 1989. Baker offered a basic discount of 50/10/10% or 59.5% on these prices. In addition, Baker offered the following cumulative quantity discounts: $ 5,001 - $15,000 50/10/10/5% (61.5%) $15,001 - $25,000 50/10/10/5/2% (62.3%) $25,001 - $50,000 50/10/10/5/2/3% (63.4%) Appeal File, Exhibit 1 at 55, 92, 95. For each special item number, Baker provided pricing data in the format required under the solicitation, i.e., using a DSMD schedule for each special item number. Appeal File, Exhibit 2. For each of the seven special item numbers, the largest discount disclosed as offered to non-government customers is consistently five percent less than the discount offered to the Government for that quantity by Baker in its proposal. Appeal File, Exhibit 2. The contracting officer and his contract specialist conducted negotiations with Baker by phone on June 10, 1991. Their negotiation memorandum, dated June 13, states that the basic discount of 50/10/10% FOB origin was deemed acceptable: (1) because it was equal to what the Government received under its current contract for the same items, and (2) because it was better than the basic discount of 50/10/5% FOB origin to Baker's most favored customer. Appeal File, Exhibit 4 at 2 (unnumbered). A letter, dated June 11, 1991, from Baker to the contract specialist and referred to in the negotiation memorandum as Baker's "best and final letter" states the following: Regarding our discount schedule, with one exception the government receives a 5% greater discount than our best commercial customers on all orders. The only exception involves orders of $75,000 list and greater. We have only one commercial customer who orders in these quantities. This is the only instance where the discount for the government does not exceed that of a commercial customer. Appeal File, Exhibit 2. Baker supplied a certification of the pricing data provided in support of its proposal. It is dated June 19 and reads: CERTIFICATION It is agreed upon with BAKER SCHOOL SPECIALTY CO., INC. that for the purpose of determining price reasonableness, negotiations shall be based on discounts equal to that given the most favored customer (MFC) PLEASE REFER TO LETTER AND DOCUMENT DATED 6/11/91 from manufacturer's pricelist dated SEPTEMBER 1989. Manufacturer certifies that their most favored customer receives (PLEASE REFER TO LETTER DATED 6/11/91[)] % discount from this pricelist. Manufacturer also certifies that pricelist submitted is the current published commercial pricelist under the provisions of Clause 600D "Catalogs And/or Pricelists". This information is applicable to Clause 390 "Price Reduction Clause". Appeal File, Exhibit 5. III. The Contract On June 26, 1991, GSA awarded a schedule contract to Baker for the offered display and communication boards. The contract period for performance is stated to run from October 1, 1991 through September 30, 1996. The contract also expressly provides that the prices and discounts are based on Baker's September 1989 pricelist and Baker's DSMD sheets which are incorporated into the contract. The contract also incorporates by reference the provisions of the solicitation and Baker's letter of July 11, 1991. The contract award document contains the following express provisions: Price Reduction: In accordance with the terms of the price reduction clause, it is agreed that contract award is predicated upon the following categories of customers as being the "Most Favored Customer" (MFC): Distributors/wholesalers . . . . If for any reason the Distributors or wholesalers [are] granted additional concessions beyond these disclosed, the Government will be due an equivalent discount. Appeal File, Exhibit 6. IV. The Post-Award Audit During the course of a postaward audit of Baker's contract, GSA determined that Baker's certification regarding discounts provided to its most favored customers was in error. Auditors found that during the months of May and early June 1991, Baker provided one of its most favored customers, J. L. Hammett (Hammett) with a basic discount of 61.5% on small quantity deliveries (i.e. less than $5,000) to some of Hammett's retail stores. On these orders, Baker also was found to have deviated from disclosed freight rates by paying half the cost of freight when the net value of these small orders exceeded $250. The smallest order in question amounted to $174. The largest was $562. The auditors also determined that during April and May 1991, Baker provided another favored customer, O'Neil Enterprises (O'Neil), with a basic discount of 60.4% on four orders, the smallest being for $21 and the largest for $843. In addition, the audit found that both Hammett and O'Neil continued to receive these discounts into the GSA contract period. Hammett's discount for purchases under $5000 actually increased from 61.5% to 65% in January 1993. O'Neil's discount, however, was reduced in February 1993 from 60.4% to 60%. Appeal File, Exhibit 12 at 6-7. The scope of the Government's audit report included reviewing sales of the more popular contract models covering four of the seven special item numbers under the contract. These four item numbers are said to represent about 80% of the purchases made by GSA contract users during the audit period of October 1, 1991 through December 31, 1993. Appeal File, Exhibit 12 at 3. The auditors reviewed contract transactions for the period under the four special item numbers. After decreasing the total prices paid, by the difference between the contract discounts and the higher undisclosed discounts extended to Hammett, the auditors concluded that the Government was due a refund of $36,614. Id. at A-1. The GSA audit provides limited detail regarding the shipments to which the undisclosed discounts were applied. No information is provided at all on which of the four special items numbers the undisclosed discounts, accorded to Hammett and O'Neil before and after award, actually refer. The post-award audit produced two audit reports which were issued on February 17, 1994. The first discusses the refund found to be due to the Government owing to Baker's failure to report certain discounts prior to contract negotiations and following contract award. Appeal File, Exhibit 12. The second report discusses recommended price adjustments for future purchases from Baker under the contract. Id., Exhibit 13. The conclusion reached in the second report is that the contract prices should be adjusted for the remainder of the contract period to reflect the 65% discount extended to Hammett by Baker in January 1993. Id. at 9. Following a review of the audit reports and discussions with appellant's representatives, the contracting officer determined that the $36,614 refund should be sought from Baker. Appeal File, Exhibit 17. By letter dated September 30, 1994, the contracting officer issued a decision demanding payment of the refund. Id., Exhibit 20. By check dated November 10, 1994, Baker, in response to a repeated demand from GSA, paid a total $36,841.68. This figure represented the original claim of $36,614 plus what GSA contended to be "interest and other late charges to the balance." Id., Exhibit 28. By letter dated November 29, 1994, Baker appealed the contracting officer's decision regarding the refund. Id., Exhibit 29. By letter dated October 4, 1994, the contracting officer provided Baker with a contract modification, effective November 1, which amended contract pricing to provide for a discount of 65% on purchases up to $714.29 and for a discount of 65/2% (65.7%) on purchases between $714.30 and $5,000. Appeal File, Exhibits 21-22. Baker complained of the action. The contracting officer replied in writing that his decision in this matter was final and that the action was taken based on Baker's failure to report discounts both during and after contract negotiations. Id., Exhibit 23. By letter dated November 29, 1994, Baker appealed this decision as well. Id., Exhibit 29. V. Baker's Defense Baker does not dispute the factual findings of GSA's audit. Rather, Baker contends that the non-disclosure at the time of negotiations was simply an oversight. Concerning the discounts given to Hammett, Baker explains that they do not represent a broad based price reduction. Instead, the sales in question are said to represent shipments made to Hammett's retail stores. These shipments, according to Baker's president, represent only 4% of Baker's business with Hammett.[foot #] 1 In most cases, the retail stores are said to order from Hammett's warehouse. When, however, the orders are urgent or the warehouse does not have an item in stock, Hammett allegedly asks Baker to deliver directly to the stores. According to Baker, because Hammett is such a good customer, it tries to accommodate such requests. Appeal File, Exhibit 19 at 2 (unnumbered). Baker also contends that, because the Government enjoys an additional five percent advantage over Hammett for most sales in small quantities and for all sales at greater quantities, the ----------- FOOTNOTE BEGINS --------- [foot #] 1 The audit report, in summarizing Baker's position, quotes Baker as stating that this figure is 6% rather than 4%. Appeal File, Exhibit 12 at 8. ----------- FOOTNOTE ENDS ----------- Government, in the aggregate, still fares better than Hammett. Appeal File, Exhibits 12 at 8, 19 at 3-4 (unnumbered). Baker also opposes the Government's claim for a refund on the ground that a price increase occasioned by the issuance of a new price list in October 1991 was never passed through to GSA customers. Appeal File, Exhibit 12 at 8. The final audit report, however, expressly states: "The recovery amount considered (and was reduced by) the impact of the October 1991 price increase that was passed on to commercial customers but not GSA contract users." Id. at 9. Finally, Baker takes issue with the Government's decision to lower all contract prices notwithstanding the fact that discounts accorded to Hammett's retail stores affected a relatively small number of items on contract. Baker estimates that this across- the- board reduction of prices will cost it an additional $50,000 to $60,000 for the remainder of the contract period. Appeal File, Exhibit 29 at 2 (unnumbered). Discussion From the facts in the record, it is clear that appellant submitted defective pricing data in its proposal. Indeed, appellant's president readily admits this fact. It is likewise clear that appellant has been remiss in advising respondent of discounts provided to other favored customers following contract award. The contract clearly provides GSA with certain rights when a contractor fails to disclose such discounts. The difficulty in this case, however, is that the Government, in asserting its rights under the contract, has painted its claim with too broad a brush. We consider first the claim for a refund of $36,614. Critical to our analysis of the Government's claim in this case is that the contract is for multiple items. In accordance with instructions contained in the solicitation, Baker submitted pricing data on separate DSMD schedules for each special item number. If the non-disclosed discounts are found to be relevant, at least one of these schedules may be defective, but we are not told which. In claims based on defective pricing data, normally, once a defect is established, a presumption of contracting officer reliance arises which it is then incumbent upon appellant to rebut. Universal Restoration Inc. v. United States, 798 F.2d 1400 (Fed. Cir. 1986). In a multiple item contract, however, logic dictates that the item involved must itself be identified. It would make little sense to conclude that the presumption of reliance arises with regard to all prices for all special item numbers, particularly when the Government insisted on the submission of separate DSMD schedules for each of the seven special item numbers. Once GSA discovered the undisclosed discounts and concluded that failure to reveal them had led to a significant increase in a negotiated price, we would expect the auditors to review transactions involving the special item numbers presumably affected by the non-disclosures in question. There is no indication in the record that this was done. Instead, the auditors selected transactions from the special item numbers which represented the greatest number of sales under the contract. Whether these items correspond to the items actually affected by the nondisclosure remains unproven. In the absence of such proof, we are not prepared to uphold the Government's refund claim. As to the contract modification decreasing all small quantity prices by the amount of the undisclosed discounts, the problem is similar. The contract provides that the price relationship between the Government and the identified customer or category of customers shall be maintained throughout the contract period. In a multiple item contract, when it is discovered that discounts have not been disclosed, one must first determine which price relationships have been affected. If the non-disclosed discounts were given on the prices for all contract items, then a price reduction in all contract prices would be appropriate. Nothing in the record, however, indicates that this is what occurred. Indeed, appellant contends that the discounts were given in relatively few instances in discrete circumstances not likely to arise in the context of this contract. GSA has offered nothing to rebut this contention. Nevertheless, GSA has claimed an across-the-board reduction of the small quantity prices for all contract items. In the absence of any convincing showing that the undisclosed discounts did in fact modify the price relationships between GSA and Hammett on all contract items, we cannot let the contract modification stand. Even though we have granted these two appeals, GSA may still be entitled under the contract to a partial refund on amounts already paid and/or to a reduction in prices to be paid in the future for certain contract items. Baker's failure to disclose discounts during and after negotiations is certainly cause for concern and may justify price adjustments on past and future purchases. Furthermore, Baker's claim of inadvertence is hardly a defense if the Government can demonstrate non-disclosure of discounts on specific items and Baker is unable to rebut a presumption of reliance on defective data in negotiating higher prices under specific item numbers. However, in the absence of essential specific information on the alleged non-disclosures, we do not reach those issues. If GSA wishes to pursue contract price adjustments based upon the same non-disclosures, it should do so in accordance with the principles set out in this opinion. Decision This appeal is GRANTED. GSA will promptly return to appellant the $36,841.68 already paid by Baker in reply to GSA's repeated demand. In addition, GSA will rescind, retroactive to the original effective date, the contract price modification reducing all small quantity contract prices by the amount of Baker's undisclosed discounts. _________________________ EDWIN B. NEILL Board Judge We concur: ____________________________ __________________________ MARY ELLEN COSTER WILLIAMS ALLAN H. GOODMAN Board Judge Board Judge