Board of Contract Appeals General Services Administration Washington, D.C. 20405 ______________________________________ GRANTED IN PART: March 31, 1998 ______________________________________ GSBCA 13250-C(12335), 13251-C(12384) 13252-C(12527), 13584 FOREMOST MECHANICAL SYSTEMS, INC., Appellant, v. GENERAL SERVICES ADMINISTRATION, Respondent. Joseph W. Kardoley, President of Foremost Mechanical Systems, Inc., Lakewood, CO, appearing for Appellant. Leigh Ann Holt, Office of Regional Counsel, General Services Administration, Denver, CO, counsel for Respondent. Before Board Judges PARKER, HYATT, and WILLIAMS. HYATT, Board Judge. Appellant, Foremost Mechanical Systems, Inc., has appealed the contracting officer's decision determining the amount of recovery to which appellant is entitled under a termination for convenience of its contract with the General Services Administration (GSA). Previously, the Board converted GSA's termination for default of appellant's contract to perform modifications to the ventilation systems in a federal office building to one for the convenience of the Government. Foremost Mechanical Systems, Inc. v. General Services Administration, GSBCA 12335 et. al, 95-1 BCA 27,382 (1994). Foremost thereafter submitted a settlement proposal for the consideration of the contracting officer. Negotiations were unsuccessful and eventually the contracting officer issued a decision awarding appellant some, but not all, of the costs claimed. Appellant has appealed that decision, asserting entitlement to the amounts not awarded by the contracting officer. In addition, under the Equal Access to Justice Act (EAJA), appellant filed a timely application for the award of attorney fees for the cost of retaining legal representation in the termination for default matter and related claims for equitable adjustments. The EAJA application was suspended pending the efforts of the parties to reach an omnibus settlement resolving the convenience termination quantum issues and the attorney fee award. The EAJA application was subsequently consolidated with the appeal of the contracting officer's final decision with respect to the settlement proposal. For the reasons stated herein, appellant's claims are granted in part. Findings of Fact Background 1. Contract number GS-07P-91-JMC-0101 was awarded to Foremost Mechanical Systems, Inc., for a firm fixed price of $92,640, on May 12, 1992. The contract required Foremost to modify existing heating, ventilation, and air conditioning (HVAC) systems in Building 14 of the Denver Federal Center, Lakewood, Colorado. It also called for construction of an extension to the building to house the HVAC equipment and the provision of electrical service in an underground trench between the building and an existing remote electrical transformer. 95-1 BCA at 136,486. 2. The contract required that the project be completed within 110 days of receipt of the notice to proceed. Foremost received the notice to proceed on May 30, 1992, establishing September 17, 1992, as the initial date for contract completion. Shortly after commencing work on the project, however, Foremost identified, and directed GSA's attention to, several problems associated with the design and specifications. As work progressed, additional design discrepancies and issues were encountered by Foremost, until Foremost reached the point where it could no longer proceed until the questions raised with GSA were resolved. 95-1 BCA at 136,486-87. 3. Throughout the summer of 1992, the defective design and specification issues gave rise to intermittent periods when Foremost was unable to perform substantial work on the project, although appellant was required to be available to work. Foremost managed to perform some work through the summer of 1992; after completing a roof addition in October, however, there was no longer any significant work that Foremost could proceed with prior to the issuance of remaining contract modifications. At the same time, it was made clear to Joseph Kardoley, Foremost's president, that he had to be available at the site to perform work once the design issues were resolved by the Government. Transcript at 171. The modifications were issued on December 24, 1992, and received by Foremost on December 27. 95-1 BCA at 136,488-92. 4. The modifications called for a considerable amount of additional work, but permitted only another ten days for completion of the remainder of the contract. In its decision overturning the termination for default, the Board found that while Foremost mobilized promptly in response to the modifications and proceeded with diligence, finishing the modified, remaining work in the ten days allotted by GSA would not have been possible. The evidence of record established that the work involved would have required significantly more than ten days to complete. Nonetheless, on January 21, 1993, GSA terminated Foremost's contract for default for failure to make progress. The Board held that the default termination action was improper and converted the termination to one for the convenience of the Government. 95-1 BCA at 136,492-93, 136,496. 5. On March 1, 1995, appellant submitted a certified settlement proposal to GSA. The settlement proposal totaled $153,140. Appellant also documented $71,118.26 in legal fees incurred in connection with litigating the termination for default action. These fees were claimed under the Equal Access to Justice Act (EAJA). In a cover letter accompanying the settlement proposal, appellant's counsel requested that GSA contact him to commence negotiations. Appeal File, Exhibit 3. 6. The initial claim consisted of the following: Direct material $ 9,675 Direct labor 24,000 Other costs (payments to subcontractors) 49,546 General and Administrative ` expenses 19,866 TOTAL COSTS 103,087 Profit 10,309 TOTAL 113,396 Settlement expenses 99,114 TOTAL 212,510 Less progress payments (59,370) NET PAYMENT REQUESTED $ 153,140 Appellant's claim was computed on a total cost basis. Copies of Foremost's monthly income statements, disbursement journals, and check registers accompanied the settlement proposal. A handwritten list of payments to subcontractors and suppliers was included as well. Appeal File, Exhibit 3. 7. On May 10, 1995, the contracting officer requested an audit of the settlement proposal. Appeal File, Exhibit 5. In requesting the audit, the contracting officer stated that the adjusted contract price was $111,743, which included a deduction for liquidated damages to be paid to the contractor as part of the settlement, that the contractor had been paid $59,370 to date, and that, in the opinion of the Government, the contract work was approximately sixty-one to sixty-five percent complete at the time of termination. Appeal File, Exhibit 5. 8. In a subsequent submission, counsel for Foremost revised the net amount claimed in appellant's settlement proposal to $163,955. This submission updated general and administrative expenses, profit, and settlement expenses, to arrive at the higher claimed amount. Appeal File, Exhibit 9. 9. Accordingly, the claim actually reviewed by the auditors was revised as follows: Direct material $ 9,675 Direct labor 24,000 Other costs (payments to subcontractors) 49,546 General and Administrative ` expenses 22,152 TOTAL COSTS 105,373 Profit 10,538 TOTAL 115,911 Settlement expenses 107,411 TOTAL 223,322 Less progress payments (59,370) NET PAYMENT REQUESTED $ 163,952 10. An audit was conducted and a report was issued on September 29, 1995. The auditor disallowed numerous costs as unsubstantiated. The auditor's report reviewed the total amount claimed of $223,322. The auditor disallowed some $80,068 of these claimed costs, concluding that only $143,254 of the total costs claimed were adequately supported. In addition to some $29,765, which was disallowed for lack of back-up documentation satisfactory to the auditors, the auditor questioned the allocation of Foremost's total operating costs to this contract during and after the termination. Appeal File, Exhibit 18. 11. Negotiations commenced after issuance of the auditor's report but reached an impasse. On January 4, 1996, the contracting officer made a formal "final offer of settlement" to Foremost. That offer was considerably lower than the amount sought by Foremost in its settlement proposal, which had subsequently been amended, to update additional settlement expenses incurred, to a total of $237,397.08. In formulating this offer the contracting officer concluded that total allowable direct costs were $76,815. In addition, the contracting officer concluded that Foremost was in a loss position under the contract and thus applied the loss formula set forth in Federal Acquisition Regulation 49.203(c). No profit was allowed. Of $107,414 claimed in settlement expenses, the contracting officer concluded that only $54,141.79 was appropriate for reimbursement. The contracting officer also reviewed all legal fees claimed in connection with the termination for default action, and determined that attorney fees should be reimbursed in the amount of $36,136.62. The final offer of settlement, including attorney fees, after adjustment for previous payments, came to $85,139.50. Appeal File, Exhibit 23. 12. In a letter dated February 6, 1996, the contracting officer issued a decision determining that the total amount owed to Foremost, including attorney fees incurred in contesting the termination for default, was $85,139.50. Appeal File, Exhibit 24. Appellant filed a timely appeal of this decision. Appeal File, Exhibit 25. The EAJA Application 13. On April 21, 1995, Foremost filed an application for the award of attorney fees and expenses under the Equal Access to Justice Act, 5 U.S.C. 504. The application sought an award of $71,118.26 in fees and expenses incurred in connection with litigating Foremost's appeals. At that time the parties anticipated that the application for fees could be negotiated and settled in conjunction with the settlement proposal filed by Foremost and thus requested that the Board postpone taking action on the application. 14. At the time of contract award and throughout the duration of the default termination litigation, Foremost Mechanical Systems, Inc. was a small mechanical contracting firm, essentially a "one man operation." Foremost's principal employee was Joseph Kardoley, its president, who performed the duties of project manager, project superintendent, and tradesman on its projects. Because of its small size, as a practical matter Foremost worked on only one large project at a time. Transcript at 167, 187-88, 190. Foremost's net worth was significantly less than the maximum prescribed for EAJA eligibility. 15. Foremost was represented by two law firms in challenging the default termination action. The first firm, Tobey and Pelz, was retained by Foremost in February 1993 and withdrew as counsel in December 1993, prior to the hearing in the case. The unpaid fees owed to this firm, for which a mechanic's lien was filed under Colorado law, totaled $20,066.58. Additionally, Foremost made an initial retainer payment to this firm of $6,000. Invoices prepared by Tobey and Pelz have been provided and reflect a total of 175.9 hours of attorney and legal assistant time devoted to the default termination litigation. After adjusting the attorney's hourly rate downward to $75 per hour, to reflect the maximum amount payable under EAJA at the time, the hours billed by Tobey and Pelz legal personnel yield a total of $12,984.50. Appeal File, Exhibit 17. Out-of-pocket disbursements by Tobey and Pelz for the period from February through December 1993 totaled $1,904.27. These amounts reflect such expenses as deposition transcripts, photocopying, fax charges, and postage costs. Appeal File, Exhibit 17. 16. The amounts due to Tobey and Pelz under EAJA have already been paid by GSA. No further amounts are due for the services of this firm. Appeal File, Exhibit 27. 17. Accompanying the application for fees and costs are invoices submitted by McKenna & Cuneo, the firm that ultimately represented Foremost through the conclusion of the default termination litigation. These invoices reflect a total of 262 hours of attorney time devoted to the default termination litigation and preparation of the EAJA application for the period from December 1993 through December 1994. Multiplied by $75 per hour, the maximum rate then payable for attorney time under EAJA, the hours billed yield a total of $19,650. In addition, a modest number of hours, apparently for assistance of law clerks or paralegals, was billed by McKenna & Cuneo, at various rates less than the $75 maximum for attorneys. The total for this assistance came to $950.50. EAJA Application, Exhibit 1. 18. Out-of-pocket disbursements made by McKenna and Cuneo for the same period totaled $1,881.18. The largest cost item paid was the fee for the hearing transcript, which was $1,404. Other items included photocopying, telephone charges, mailing costs and messenger services. EAJA Application, Exhibit 1. The Settlement Proposal 19. The record concerning Foremost's claim for total costs associated with contract performance to the date of termination consists of documentary evidence, such as Foremost's financial statements for the relevant periods, invoices, copies of canceled checks, receipts, disbursement journals, subcontracts, and the like. To facilitate an effective response to the report of the GSA auditors, appellant retained an independent certified public accountant, Mr. Grabau, to review the settlement proposal and audit. The report of this accountant, along with the GSA audit and the testimony of the auditors and Mr. Grabau, is in the record as well. Appellant's Hearing Exhibit 27; Transcript at 73-160, 455-557. 20. In preparing his independent report, appellant's auditor reviewed, among other items, the GSA audit and the auditors' work papers, and relevant portions of the Code of Federal Regulations (CFR) regarding contract cost principles and regulations. In addition, the accountant reviewed the financial statements of "Foremost Mechanical Systems, Inc., for the years ended December 31, 1992 and 1993, and read the underlying financial data related to these financial statements, including but not limited to invoices, canceled checks, payroll journals, cash receipts, sales invoices, accounts receivable, [and] accounts payable." Appellant's Hearing Exhibit 27. Total Costs 21. Foremost's settlement proposal listed $9,675 in direct materials expenses. Appeal File, Exhibits 3, 9. The audit report questioned $730 of these costs, primarily for lack of documentation showing that the costs were incurred in connection with this contract. Appeal File, Exhibit 18. The contracting officer disallowed the questioned costs in her final decision. Appeal File, Exhibit 24. Appellant's accountant, a certified public accountant, who performed an independent audit of this claim, was able to track $680 of the $730 as allocable to the Building 14 contract. Appellant's Hearing Exhibit 27. 22. Foremost listed direct labor expenses of $24,000 in its settlement proposal, attributable to eight months of salary of its principal employee, Mr. Kardoley, who was paid $3,000 per month.[foot #] 1 The GSA auditor disallowed $5,876 of these expenses, pointing to a lack of satisfactory documentary support for Foremost's explanation that this amount represented tax withholdings. It was established at the hearing that in fact this amount represented the taxes withheld on these wages. Transcript at 10-12, 84-85; see also Appellant's Hearing Exhibit 27. 23. Foremost listed $49,546 in other costs incurred in performing under the contract. These costs consisted of payments made to subcontractors and suppliers and an unpaid invoice to a sheet metal fabricator. Appeal File, Exhibits 3, 8. The auditor disallowed $10,852 of this amount, again claiming a lack of satisfactory documentation tracking the cost claimed to the contract. Appeal File, Exhibit 18. The largest item disallowed was the bill for the sheet metal contractor, in the amount of $4,120. The contracting officer, based on her personal familiarity with the contract and the inventory on hand at termination, disagreed with the auditor and determined that this item was allocable to the contract and thus allowable. Appeal File, Exhibit 24; Transcript at 342-43. 24. In a supplemental appeal file and at the hearing, Foremost produced, and Mr. Kardoley and his spouse satisfactorily attested to, numerous subcontract documents, checks, and invoices supporting the various charges included as costs in the termination settlement proposal. It is not entirely clear if or why these documents were not made available to the GSA auditor. In any event, there is sufficient evidence in the record to accept appellant's claims that the direct material and labor costs claimed are in fact attributable to this contract. Supplemental Appeal File, Exhibits 5-7, 11, 18-19; Appellant's Hearing Exhibits 1-26; Transcript at 8-23, 80-105, 131-153, 203- ----------- FOOTNOTE BEGINS --------- [foot #] 1 At the hearing, Mr. Kardoley testified that he currently earns approximately $3,500-3,600 a month as an employee of a company that does the type of work Foremost used to do, thus verifying the reasonableness of his salary expenses. Transcript at 216. ----------- FOOTNOTE ENDS ----------- 04. The allocability of these claimed costs was also verified by appellant's independent accountant. Appellant's Hearing Exhibit 27. 25. Foremost claimed a total of $22,152 in general and administrative expenses, which it identified as overhead expenses for the period from June 21, 1992 through January 21, 1993. Appeal File, Exhibits 3, 8. The GSA auditor disallowed $15,220 as unallocable for failure to provide sufficient documentary support to show that the expenses claimed were operating expenses of the business and because $127 of this amount was for advertising expenses, which are unallowable by regulation.[foot #] 2 The GSA auditor thus allowed only $6,382 in general and administrative expenses. Appeal File, Exhibit 18; Appellant's Hearing Exhibit 27. 26. The documentation accompanying Foremost's settlement proposal includes income statements for the firm. These statements show various operating expenses, such as insurance, accounting expenses, expenses associated with maintenance of the company vehicle, and the like. These expenses appear to have been totaled to derive Foremost's general and administrative expenses for the contract period. Appeal File, Exhibit 3. 27. The independent accountant retained by appellant to review the claim testified that he was able to determine, based on his review of the records and documents available, that another $3,881 in allowable and allocable general and administrative costs were incurred by the company over the period in question. Appellant's Hearing Exhibit 27. 28. In light of the additional evidence addressed at the hearing, the Government requested an opportunity to review the documentation again and revise the audit report. The revised report was submitted as Exhibit 18A of the Appeal File. Based on the auditor's revisions, the contracting officer's determination that $54,231.39 in total costs was due appellant would be revised to allow $58,746.39. Respondent's Post-Hearing Brief, Exhibit A. Profit 29. Foremost used a profit rate of ten percent in its settlement proposal. The auditor did not challenge this rate. The contracting officer similarly did not focus on the rate claimed, but rather concluded that no profit is authorized based ----------- FOOTNOTE BEGINS --------- [foot #] 2 Mr. Kardoley explained that the item listed as advertising was a small one-line listing in the yellow pages of the telephone company's directory. Mrs. Kardoley listed the charge for this as advertising at the instructions of an accountant. Transcript at 178-79. ----------- FOOTNOTE ENDS ----------- on her determination that Foremost was operating in a loss position under the contract. Appeal File, Exhibits 18, 24. Settlement Expenses 30. As of the hearing, Foremost claimed a revised total of $115,873 in settlement expenses. This consisted of three categories of expenses: the amount of $13,740 in legal fees charged by McKenna & Cuneo for assisting in the preparation of the settlement proposal and the effort to negotiate a settlement with GSA; the amount of $61,877 in demands made by the Government against Foremost's surety company, for which Foremost was liable; and the amount of $40,256, representing unabsorbed overhead for a lengthy period following the termination for default during which Foremost was unable to obtain other construction work. Appellant's Hearing Exhibit 28; Appeal File, Exhibit 8. Legal Fees 31. Legal fees for assistance in preparation of the settlement proposal were initially estimated at $5,000 in the proposal submitted by Foremost. No billings or updates were submitted by Foremost's former counsel, McKenna & Cuneo, prior to the hearing; thus, these fees were largely disallowed by GSA for lack of supporting documentation. Appeal File, Exhibit 24. The full amount of legal fees charged by McKenna & Cuneo for assisting Foremost in preparing the settlement proposal and in negotiating with GSA are itemized in Appellant's Hearing Exhibit 28, which was produced at the hearing in this matter. Supporting testimony was provided by appellant's former attorneys. Transcript at 25-50, 61-72. 32. As noted by respondent, the first invoice, for the amount of $848, submitted in support of McKenna & Cuneo's fees for assisting Foremost in the settlement process, is dated January 17, 1995, and represents charges attributable to preparation of the EAJA claim filed in connection with the default termination action. These fees are properly attributable to the EAJA claim and have been considered in connection with that proceeding. See Appellant's Hearing Exhibit 28. 33. McKenna & Cuneo withdrew as counsel for Foremost effective April 23, 1996. In the billings submitted to document the amounts claimed as incurred in support of the settlement, several charges are for items such as the cost of researching and drafting an attorney's lien and a motion for withdrawal of appearance. These amounts, totaling $352, are not attributable to the efforts to effect a settlement. Appellant's Hearing Exhibit 28. 34. Although charges for attorney time totaling the amount of $288 were billed in November 1996, some time after McKenna & Cuneo formally withdrew as counsel for appellant in the negotiation of the proper amount of termination for convenience costs, the explanation of the time spent supports the conclusion that counsel were assisting in a last attempt to settle this matter prior to resorting to litigation. Appellant's Hearing Exhibit 28. 35. Based on findings 27 to 30 above, the amount of settlement fees claimed by McKenna & Cuneo that are properly attributable to recoverable settlement expenses is $12,540.44. Surety Payments 36. Foremost's surety paid $54,709.15 to GSA in response to a demand for payment made by GSA under the performance bond. The surety has demanded indemnification from Foremost under the bond. Appeal File, GSBCA 12553, Exhibit 170.[foot #] 3 In addition, the surety paid the bills of two of Foremost's suppliers under the payment bond. The payment bond amounts were for $5,200.40 to Power Contracting and $2,693 to C.D. Jones Company. The total amount paid by the bonding company under the performance and payment bonds came to $62,602.55, which is the amount claimed by Foremost as a settlement expense. Transcript at 53-55; Supplemental Appeal File, Exhibits 19-20. 37. The contracting officer agreed that the surety's payment of $54,709.15 to GSA under the performance bond was properly a settlement expense required to be repaid by GSA under the regulations governing terminations for convenience. She excluded the amounts paid under the payment bond from this category, reasoning that these payments are direct costs not properly included under settlement costs. She did not, however, add these costs to direct costs claimed by Foremost in its settlement proposal. Appeal File, Exhibit 24. Post-Termination Unabsorbed Overhead 38. Foremost's amended settlement proposal included a claim for $40,526.78 in unabsorbed overhead for the period following the termination of the contract, from January 1993 through January 31, 1994. Foremost's counsel explained this item as a cost resulting from the wrongful default termination, which led to the eventual demise of Foremost as a business entity. As a result of the default termination, Foremost was unable to obtain bonding, was drained of capital, and was stigmatized as a government contractor. Supplemental Appeal File, Exhibits 8, 21; Transcript at 186, 192-94. 39. The auditor determined that extended overhead was not due because Foremost was able to obtain other work. Appeal File, ----------- FOOTNOTE BEGINS --------- [foot #] 3 The appeal file from the default termination litigation was incorporated into this record. ----------- FOOTNOTE ENDS ----------- Exhibit 18. Mr. Kardoley explained that this "other work" was not equivalent projects, but the occasional service call to replace an air filter in an HVAC unit and the like. These ongoing service calls constituted about ten percent of Foremost's income during contract performance and the period following the termination. Transcript at 190. 40. Mr. Kardoley further explained that although he bid on other jobs, he was unable to obtain other projects equivalent to the terminated contract because of the loss of his bonding capacity. Transcript at 192-93. 41. The contracting officer rejected the claim for post- termination unabsorbed overhead in her final decision, stating her understanding that the claim had been withdrawn during negotiations and that in any event, the auditor's determination that Mr. Kardoley had other work barred making such a payment under the convenience termination settlement. Appeal File, Exhibit 24. The Contract Price 42. The contracting officer's final decision establishes the contract price at $112,463. In making adjustments to the contract price, the contracting officer recognized that Foremost was entitled to price increases for changed work associated with modifications to the electrical and other work under the contract. Appeal File, Exhibit 24. 43. During the default termination proceeding, it was conceded by the Government that a price adjustment would be appropriate because of a differing site condition encountered by Foremost when it undertook repairs to the roof and construction of the new roof.[foot #] 4 The Government stated in a letter to Foremost that it would unilaterally adjust the contract price to account for this differing site condition. 95-2 BCA at 136,490. In a letter to the contracting officer dated November 22, 1992, Foremost claimed an equitable adjustment of $7,500 for the combined cost of repairing the roof, which the Board held appellant was required to do under the contract, and the differing site condition created by the varying materials encountered. Appeal File, GSBCA 12335, Exhibit 26. The cost of the roofing repairs was stated to be $3,200. From this we conclude that, at that time, Foremost claimed the cost of the differing site condition to be approximately ----------- FOOTNOTE BEGINS --------- [foot #] 4 The existing roof material differed from that depicted in the drawings and specifications. 95-1 BCA at 136,494 n.11. ----------- FOOTNOTE ENDS ----------- $4,300.[foot #] 5 There was no Government estimate reflecting GSA's independent judgment as to the cost of the differing site condition. Transcript at 405. The contracting officer's final decision simply states that no adjustment is made to the contract price for this claim because appellant did not submit a pricing proposal showing the cost of the changed work. Appeal File, Exhibit 24. 44. Foremost's pricing proposals for the changed work were significantly higher than the amounts allowed by the contracting officer. For example, appellant's initial proposal for the increased work associated with the necessary changes to the electrical specifications, which was based on subcontractor prices, came to nearly $15,000. Appeal File, GSBCA 12335, Exhibit 152. The contracting officer allowed only $10,375. Appellant's proposal for additional ductwork came to $11,464. The contracting officer allowed only $6,790. Appeal File, Exhibit 24; Transcript at 355. 45. Foremost's stated costs for the two claimed contract changes on which it did not prevail were approximately $3,200 for the work on the roof and $6,000 for the air handling unit. Appeal File, GSBCA 12335, Exhibits 11, 98. 46. The contracting officer's final decision makes no adjustment to the contract price for the lengthy periods of delay when Foremost was unable to progress with work while it awaited clarification or issuance of a modification to the specifications. Appeal File, Exhibit 24. Given the evidence of record in the default termination litigation, see 95-1 BCA 27,382, a conservative estimate of these delays, attributable to the Government, would be at least three months. Since the record shows that Mr. Kardoley's salary was $3,000 per month, finding 22, the contract price would appropriately be adjusted by at least ninety percent of this direct cost, or $8,100.[foot #] 6 Other amounts, to reflect the appropriate share of operating expenses, should also be added to the contract price. Application of the Loss Formula 47. Using a contract price of $112,463, the contracting officer concluded that based on costs found by GSA to have been ----------- FOOTNOTE BEGINS --------- [foot #] 5 In the post-hearing brief, appellant asserts that the cost associated with the differing roof materials was about $3,500. [foot #] 6 Mr. Kardoley testified that the "other jobs" he worked on were in the nature of service and maintenance calls, generating approximately ten percent of his revenues. Finding 39. ----------- FOOTNOTE ENDS ----------- incurred ($76,815) plus the amount GSA asserts would have been required to complete the work ($82,486) Foremost was in a loss position under this contract. On this basis, she awarded no profit, and also concluded that Foremost had been overpaid $5,138.61, which the Government contends should be repaid with interest. Appeal File, Exhibit 24. 48. The dollar amount used by the contracting officer as the probable cost to complete is based on the contract price paid to the completion contractor who bid for the work after termination of Foremost's contract. Transcript at 385; see Appellant's Supplemental Appeal File, Exhibit 25. 49. The record also reflects, as of the time of termination, various Government estimates of the cost to complete remaining work, ranging from $35,000 to $53,000. Transcript at 345. In a memorandum supporting the decision to terminate the contract for default, the contracting officer then responsible for contract administration stated that the remaining contract work was neither difficult nor complex, and would cost approximately $35,000 to complete. Appellant's Supplemental Appeal File, Exhibit 24. 50. Mr. Kardoley testified that because of the small size of his company, its relatively low overhead, and his overall experience and familiarity with the job, Foremost could have completed the remaining work without sustaining a loss. He also stated that he was significantly further along with the contract work than GSA's sixty-five percent completion estimate recognized. Transcript at 201-05, 376. Discussion Although the issues before us were consolidated at the request of the parties, these cases present two distinct overall issues for decision. First, there is the claim for attorney fees and other costs under EAJA arising out of the termination for default action. This matter is readily resolvable, particularly since the Government has carefully reviewed the fee application and agreed to the propriety of most of the monies claimed. The major adjustment required with respect to the EAJA application is to the hourly rate claimed by the attorneys. Respondent properly points out that, by statute, any award of attorney fees must be limited to $75 per hour. The second issue before us -- the proper amount of quantum to be awarded Foremost in settlement of the termination for convenience -- is less cut and dried. EAJA Fees Following issuance of the Board's decision overturning the default termination, Foremost filed a timely application to recover attorney fees and expenses pursuant to EAJA, 5 U.S.C. 504 (1994). EAJA authorizes courts and agency tribunals to award attorney's fees and other expenses to individuals and small businesses that prevail in litigation against the Government, unless the Government's position was substantially justified. It is the Government's burden to demonstrate that its position in the underlying litigation was substantially justified or that special circumstances exist that would render an award of attorney's fees unjust. See Community Heating & Plumbing v. Garrett, 2 F.3d 1143 (Fed. Cir. 1993). Here, GSA does not dispute Foremost's status as a prevailing party or its eligibility to recover EAJA costs. Nor does GSA assert that its actions were substantially justified or that special circumstances preclude an award under EAJA. Accordingly, the issue before us with respect to the award of fees under EAJA is the determination of the proper amount to be awarded. See Cardinal Maintenance Service, Inc. v. General Services Administration, GSBCA 13269-C(12829), 95-2 BCA 27,783. The contracting officer determined that the attorney fees and expenses should be reimbursed in full, after adjusting the hourly rates charged by the attorneys to the maximum allowed of $75 under the Act. We agree. Both firms that represented Foremost have provided the requisite documentation reflecting the time spent by attorneys and legal assistants on matters relevant to the litigation and itemizing concomitant expenses. See Oliveira v. United States, 827 F.2d 735, 744 (Fed. Cir. 1987). For both firms, the hours billed are reasonable given the efforts necessary to prevail in the litigation. GSA has already made the proper payment under EAJA for the services of Tobey and Pelz. Finding 16. For McKenna & Cuneo, after adjusting the hours billed by the attorneys to reflect an hourly rate of $75, recoverable attorney fees total $19,650. Added to this is $950 for time billed by legal assistants and $1,881.18 in out-of-pocket expenses. Findings 17-18. Accordingly, we find that the remaining EAJA award to which Foremost is entitled is $ 22,481.18.[foot #] 7 ----------- FOOTNOTE BEGINS --------- [foot #] 7 The contracting officer's final decision asserts that GSA is entitled to a reduction in attorney fees to reflect time devoted to issues on which Foremost did not prevail at the hearing. These issues consisted of equitable change claims concerning specifications for the type of HVAC equipment required to be installed and for roofing repairs required to be made by appellant. The EAJA application did not segregate the fees nor can a basis for segregating the fees be readily derived from the documentation submitted. Although the Board did not uphold appellant's claims for additional monies on these items, the delays and issues arising with respect to these claims were integral to an understanding of the events leading to the default termination and, thus, we do not find that it is appropriate to reduce the award. In any event, respondent has not argued or suggested, in its post-hearing brief, that the amount awarded should be reduced to reflect a lack of success in these ancillary issues. ----------- FOOTNOTE ENDS ----------- Termination for Convenience Quantum The guiding principles to be applied in determining the costs to be allowed a contractor whose contract has been terminated for convenience are set forth in Federal Acquisition Regulation (FAR) 49.201: (a) A settlement should compensate the contractor fairly for the work done and the preparations made for the terminated portions of the contract, including a reasonable allowance for profit. Fair compensation is a matter of judgment and cannot be measured exactly. In a given case, various methods may be equally appropriate in arriving at fair compensation. The use of business judgment, as distinguished from strict accounting principles, is the heart of a settlement. (b) The primary objective is to negotiate a settlement by agreement. The parties may agree upon a total amount to be paid the contractor without agreeing on or segregating the particular elements of costs or profit comprising this amount. (c) Cost and accounting data may provide guides, but are not rigid measures, for ascertaining fair compensation. In appropriate cases, costs may be estimated, differences compromised, and doubtful questions settled by agreement. Other types of data, criteria, or standards may furnish equally reliable guides to fair compensation. The amount of record keeping, reporting, and accounting related to the settlement of terminated contracts should be kept to a minimum compatible with the reasonable protection of the public interest. In construing these guidelines, this Board has observed that it is "axiomatic that . . . one must strike a balance between the need for technical compliance with regulatory requirements and the need for basic fairness." Spectrum Leasing Corp. v. General Services Administration, GSBCA 12189, 95-1 BCA 27,317, at 136,185-86 (1994). In fashioning an award, the cost standards of the FAR, in part 31, are applied in accordance with principles of business judgment and fairness, Codex Corp. v. United States, 226 Ct. Cl. 693, 699 (1981), with the ultimate objective of making the contractor "whole." See Industrial Refrigeration Service Corp., VABCA 2532, 91-3 BCA 24,093, at 120,595. The boards have discretion to balance the "fairness concept" with strict accounting standards to fashion an appropriate award of costs to the terminated contractor. Spectrum Leasing Corp., 95-2 BCA at 136,186 (citing Codex Corp. and Fiesta Leasing and Sales, Inc., ASBCA 29311, 87-1 BCA 19,622). Generally, the terminated contractor is entitled to full reimbursement of costs incurred, plus a measure of profit, unless it can be shown that it would have sustained a loss on the entire contract, in which case no profit is allowed and, where appropriate, its recovery may be reduced. See Nolan Brothers, Inc. v. United States, 405 F.2d 1250, 1253 (Ct. Cl. 1969). The principal areas of disagreement concerning the proper amount of Foremost's recovery concern 1) the level of proof necessary to demonstrate and recover costs incurred in contract performance to the time of termination, and 2) whether Foremost was in a loss position, as the Government contends, when the contract was terminated. We address first the record keeping issues, and the amount of actual recoverable costs incurred by Foremost. Foremost's Record Keeping One of GSA's principal positions with respect to the settlement proposal is that Foremost's records could not be adequately verified by the auditors to contain only costs that were properly attributable to the contract. This position is generally not supported by the record. Foremost, a small, closely-held corporation, maintained general ledgers, disbursement journals and accounting records commensurate with the level of record keeping normally attained by companies of comparable size. The contractor performed only one major construction project at a time, supplementing its proceeds with small jobs and service calls amounting to at most ten percent of the company's total income. Finding 14. There were not numerous other jobs to which costs would have been allocable. Additionally, the proposal was based not on estimates, but on actual costs incurred in contract performance. These costs are supported by canceled checks, invoices, and subcontract documents. The adequacy of Foremost's record keeping is supported not only by documentation in the record, but by the testimony of Mrs. Kardoley, who kept the company books, and of an independent accountant who reviewed the claim and supporting documentation. Both of these witnesses provided credible testimony supporting the company's methods of record keeping and accountability. Findings 19-28. Although Foremost may not have kept its books in the same fashion as a larger company, based on the record before the Board, the records and detail available to verify the costs claimed by Foremost are more than adequate to protect the public interest as required by the termination for convenience regulations.[foot #] 8 The regulations are not intended to place an excessive record-keeping burden on companies whose fixed-price contracts are terminated for the convenience of the Government. See, e.g., RHC Construction, IBCA 2083, 88-3 BCA 20,991. Total Costs The termination for convenience regulations provide for recovery of actual costs incurred in performance, allocable general and administrative expenses (overhead), and profit. The initial issue is how much of the actual expenses claimed by Foremost were properly supported. As stated, the Board finds that the documentation provided in support of the claimed costs supports a good portion of these costs. We address, in turn, each element of this aspect of the claim. Direct Costs The amount of $9,675, claimed for the cost of materials purchased directly by the contractor, was verified by the GSA auditor with the exception of $730. Finding 21. The accountant retained by Foremost was able to verify that of the questioned $730, an additional $680 was attributable to the contract. Finding 21. Accordingly, we conclude that Foremost has supported a total of $9,625 in direct materials costs. The amount of $24,000 in direct labor costs represents Mr. Kardoley's salary of $3,000 per month. The auditor disallowed $5,876. It has been established by appellant that this amount represented legally-required tax withholdings from Mr. Kardoley's salary for payment of taxes. Finding 22. We thus find that the entire $24,000 is properly supported. The amount of $49,546 represents payments to subcontractors and suppliers. Although the auditor disallowed costs totaling $10,852, for lack of documentation, the contracting officer determined that $4,120 of these costs should in fact be paid as attributable to the contract. The contracting officer declined to award the remaining $6,732 disallowed by the auditor. Mr. Grabau was able to locate documentation that satisfied him that ----------- FOOTNOTE BEGINS --------- [foot #] 8 We recognize that the Government has stated that its rejection of proposed costs was based on the lack of supporting documents such as invoices and that the Government takes the position that much of the supporting documentation provided by Foremost in its appeal and at the hearing was, for reasons that are not explained in the record, not made available to respondent's auditor. Nonetheless, even after reviewing the proposal subsequent to the conclusion of the hearing, with the benefit of the additional documentation, GSA's position with respect to the costs claimed was not substantially altered. Finding 28. ----------- FOOTNOTE ENDS ----------- all of the costs claimed were allocable to the contract. Finding 23. We conclude that the documentation is sufficient to justify an award of the entire amount claimed. In addition, the contracting officer, in examining Foremost's claim for reimbursement of amounts expended by its surety, properly noted that some $7,893.40 of the amount claimed related to direct costs paid for under the payment, rather than the performance, bond. As discussed further below, the contracting officer, while excluding the reimbursement of subcontractors under the payment bond as a settlement expense, did not add these amounts to direct costs, although they do not appear to have been included in costs claimed under this portion of appellant's proposal. Since it does not appear to be disputed that these costs were incurred, we include them here. General and Administrative Expenses With respect to Foremost's claimed general and administrative expenses, the GSA auditor and the contracting officer accepted only the amount of $6,382 out of the claimed $22,152. The independent accountant verified an additional $3,881, for a total allocable, allowable amount of $12,713. Findings 25-27. We conclude that amounts verified by Mr. Grabau are substantiated in the record and award the amount of $12,713. Summary of Total Costs Based on the above, we calculate the allowable "total costs" portion of the settlement to be as follows: Direct material $ 9,625 Direct labor 24,000 Other costs (payments to subcontractors) 49,546 (bond payments) 7,893 General and Administrative ` Expenses 12,713 TOTAL COSTS 103,777[foot #] 9 Having determined that these are the total costs shown to have been incurred by Foremost prior to the termination of its right to proceed, we now address the Government's contention that Foremost was clearly in a loss position on this contract, such that it is entitled to no profit and that its recovery must be adjusted to account for the loss position. Application of the Loss-Adjustment Formula ----------- FOOTNOTE BEGINS --------- [foot #] 9 Dollar amounts have been rounded. ----------- FOOTNOTE ENDS ----------- The overall operation of the termination for convenience clause for fixed-price contracts and the underlying premise of the loss-adjustment formula has been aptly summarized by the Corps of Engineers Board as follows: The theory is that a contractor should be paid all costs to it of performing the terminated contract, and, in addition, should be paid settlement costs (the costs of proving performance costs to the Contracting Officer, and other reasonable costs incidental to the termination rather than to the basic contract work . . .). Unless it is established that completion of the contract would have resulted in a loss to the Contractor, the Contractor is also to be paid a fair and reasonable profit on the costs of performance, though not on the settlement costs. The total of costs of performance and profit are limited to the current contract price. However, if it is established that the termination rescued a contractor from a potential loss if the contract had been completed, then the contractor is not entitled to profit on its performance costs. Furthermore, if the costs to complete the work can be determined, the Contractor's actual performance costs are to be reduced to reflect the rate of loss being experienced. Thus, a contractor terminated for convenience loses some of its expected profits on a profitable contract (anticipatory profits on work not completed), but, on a loss contract, suffers only a pro rata share of the loss it would have suffered if the contract had been completed. Tom Shaw, Inc., ENG BCA 5540, et. al, 93-2 BCA 25,742, at 128,072-73. The question of whether Foremost would have been in a loss position had it completed the contract work depends upon 1) the level of adjustments required to be made to the contract price to account for Government-ordered modifications and for constructive suspensions of work; and 2) the determination of the likely cost for Foremost to complete the work. Here, although we are not able to determine a precise amount by which the contract ceiling should be increased, we find that the record justifies the conclusion that a sufficient price adjustment would have been called for to avoid a loss contract. This is particularly so given the range of estimates for completion of contract work and appellant's assurances that with proper adjustments for changed work and delays it could have completed the contract without sustaining a loss. GSA argues that its application of the loss adjustment formula is supported by the board's reasoning in Paul E. McCollum, Sr., ASBCA 23269, 81-2 BCA 15,311 at 75,821. McCollum set forth and applied the formula to be used to adjust the contractor's recovery when a termination for convenience has rescued the contractor from a prospective loss. In that case, as here, an improper default termination was converted to one for the convenience of the Government. There, however, the parties did not contest the contract price and the Government's evidence clearly demonstrated that its cost to complete was less than what the contractor would have incurred had it been required to perform. In contrast, GSA and Foremost did not agree on the pricing of adjustments under this contract. The contracting officer limited her proposed adjustments to amounts considerably less than were requested by the contractor and did not in any way account for the increased costs incurred by Foremost as a result of the Government's prolonged consideration of necessary modifications of the defective specifications for electrical and other work. In addition, no adjustment was made to reflect the differing site condition with respect to roofing materials, even though GSA has conceded that some pricing adjustment was called for.[foot #] 10 Although we understand the contracting officer's concern with seeking additional documentation from the contractor to support adjustments to the price, the record and the tenor of the convenience termination regulations permit a less stringent approach to this issue. In the decision overturning the default termination, the Board found that while two of Foremost's various claims for price adjustments were not valid, the overall challenge to the default termination was sustained. In particular, the Board found that defective specifications and delays in responding to requests for modifications to and clarifications of specifications caused considerable delay and negated the Government's claim that the default was justified because of appellant's failure to make progress. The contract work was originally scheduled to be completed in September 1992. Delays resulting from problems with the specifications were encountered almost immediately. Foremost completed as much work as it could by October 1992 and after that was idle much of the time awaiting the Government's determination as to how to perform the necessary electrical work. 95-2 BCA at 136,492. In addition to the changed work, and the added cost of performing changes to the specifications, from the record developed in the default termination proceeding it is clear that ----------- FOOTNOTE BEGINS --------- [foot #] 10 The only evidence of record as to what that cost would have been are appellant's assertions that the cost was between $3,500 and $4,300. Finding 43. ----------- FOOTNOTE ENDS ----------- significant delay in the progress of contract work was caused by the Government's failure to respond promptly to these issues. We thus conclude that a reasonable and conservative estimate of Government-caused delay as of the time of termination would be at least three months. Foremost was required to stand by at all times to recommence work upon issuance of modifications resolving outstanding issues, but was not given any information as to when such changes would be forthcoming. Given the company's limited bonding capacity, moreover, no meaningful replacement work could have been obtained even if Foremost was not required to stand by. Finally, the record demonstrates that the small maintenance and handyman-type projects completed by Foremost both during and after contract performance constituted only a minimal portion of the company's business and could not and did not serve as a substitute for a major project. Under these circumstances, even without determining other compensable costs, an adjustment for Mr. Kardoley's salary and allocable company overhead should have been made to the contract price to compensate for the added expense to Foremost of this significant delay. See Finding 46. Moreover, Foremost was entitled to price adjustments for changed work that reimbursed its reasonable actual costs, not just what the Government estimated to be the cost to perform changed work. See Bruce Construction Corp. v. United States, 324 F.2d 516 (Ct. Cl. 1963); Herman B. Taylor Construction Co. v. General Services Administration, GSBCA 12915, 96-2 BCA 28,547; Hof Construction, Inc. v. General Services Administration, GSBCA 13321, 96-2 BCA 28,406. Although the contractor would ordinarily be required to prove these actual costs with some measure of certainty to obtain an equitable adjustment, the precise amount of an equitable adjustment for such costs under a convenience termination is pertinent only to decide whether it is appropriate to invoke the loss adjustment formula and to establish entitlement to an award of profit. Here, the available evidence as to the price adjustments which would have been made to the contract price had the work been completed and the contractor's claims properly and fully considered, is inconclusive. The Board is not in a position to determine what that price would have been. We are persuaded, however, that the price ceiling should have been higher than the amount computed by GSA in addressing Foremost's claim. The determination of whether Foremost might have been in a loss position is further complicated by lack of persuasive evidence as to the likely cost to Foremost to complete remaining work under the contract. The Government takes the position that one of two numbers should be used -- either the cost of the follow-on contract or the estimate prepared by the previous contracting officer. Neither of these amounts is persuasively supported by the Government, however. Mr. Kardoley has placed no dollar amount on his probable cost to complete but has averred that he could have completed the remaining work without incurring a loss. The evidence of record is completely inconclusive as to the likely cost to Mr. Kardoley of completing performance under the contract. Accordingly, we determine that Foremost was not clearly in a loss position so as to warrant a reduction of its recovery of proven costs. This conclusion is particularly appropriate where the Government's conduct has contributed to the increased costs encountered by a contractor in performing work, such that it would not be fair to penalize the contractor by applying the loss formula. Wolfe Construction Co., ENG BCA 5309, 88-3 BCA 21,122, at 106,655-66. In the absence of more convincing evidence of what the contractor's cost to complete would have been, and given that many of the increased costs incurred by Foremost in performance are attributable in whole or in part to the Government, we are unable to conclude that Foremost would have been in a loss position so as to justify the application of the loss adjustment formula, reducing his recovery of total costs incurred. Although we will not apply the loss adjustment formula, reducing the amount of costs that appellant could recover, at the same time, we recognize that appellant failed to demonstrate entitlement to two of its change claims. Notably, the increased cost claimed for the air handling unit was stated by appellant to be $6,000. Presumably, the other claim, relating to the cost of repairing the existing roof, also increased appellant's costs. As a result, while we are not willing to apply the loss formula under these circumstances, we are similarly reluctant to find that appellant would have made a profit had it performed this contract fully. Accordingly, we decline to award profit on the total costs sustained here. \ Settlement Costs The settlement costs claimed by Foremost include payments to the surety, fees expended by Foremost's attorney to assist in the preparation and negotiation of the claim, and extended unabsorbed overhead incurred by Foremost following the termination of the contract for default. Of these, we are able to award the bulk of the surety expenses and the attorney fees as properly allowable expenses under the regulations. The unabsorbed overhead is not a recoverable cost, however. Surety Expenses Under the Performance Bond The surety paid out amounts under both the payment and the performance bond for which Foremost is liable. The contracting officer, in addressing this element of recovery, correctly noted that only the payments under the performance bond, for excess costs of completion by the follow-on contractor, are payable as settlement costs. See William Green Construction Co. v. United States, 477 F.2d 930 (Ct. Cl. 1973), cert. denied, 417 U.S. 909 (1974); Shipco General, Inc., ASBCA 37842, et al., 90-1 BCA 22,355 (1989). The payment to Foremost's subcontractors under the payment bond should be treated as a direct cost. Although the contracting officer excluded this amount from settlement expenses, she did not add it into total costs under the settlement proposal, presumably because of her conclusion that Foremost was in a loss position and thus could not recover these amounts. Given that there is no assertion or evidence that this cost is already included in Foremost's direct costs, we add the amount of $7,893 to the total costs currently claimed. The amount of $54,709.15 is recoverable as a settlement expense. Post-Termination Unabsorbed Overhead Appellant's claim for some $40,000 in unabsorbed overhead following the termination of its contract was properly rejected by the contracting officer. Appellant argues that this cost was incurred and is attributable to the wrongfully terminated contract because the default termination adversely affected Foremost's bonding capacity and it was unable to obtain further comparably-sized projects to keep the company afloat. The regulations, however, do not provide for reimbursement of these types of cost, which are considered to be consequential and speculative. Thus, post-termination overhead, like claims for lost business, is not a cost that may properly be allowed under the applicable regulations. See, e.g., Metadure Corp., ASBCA 21183, 83-1 BCA 16,208 (1982) (citing William Green Construction Co. v. United States, 477 F.2d 930 (Ct. Cl. 1973), cert. denied, 417 U.S. 909 (1974) ). The precedent cited by appellant, Southland Manufacturing Corp., ASBCA 16830, 75-1 BCA 10,994 (1974), reconsideration denied, 75-1 BCA 11,272, does not support an award of post- termination unabsorbed overhead in the circumstances present here. In Southland the board recognized that continuing overhead costs that are associated with winding up terminated contracts are properly allocable to the terminated contracts and may be reimbursed. There, the Government had improperly terminated for default six contracts with the appellant manufacturer; the board held that after appellant completed work in process, it was entitled to a three month period to wind up its remaining contracts. The board awarded an amount that had been stipulated by the parties. Foremost did not incur continuing costs associated with this contract so as to permit us to allocate a portion of its post-termination overhead to the contract. Rather, its claim is based upon the inability to obtain replacement work to cover that overhead. Unlike the board in Southland, we have no basis here to justify an exception to the general rule. Attorney Fees The attorney fees billed by McKenna & Cuneo as settlement expenses are recoverable, as determined in findings 31-35. We award the amount of $12,540.44. Accountant's Fees In its post-hearing brief, appellant also argues that its settlement expenses should be supplemented by the costs of the accountant retained to testify at the hearing. Foremost's accountant was retained, however, after the filing of the appeal, to review the claim and testify in the litigation action, rather than to assist in the preparation and negotiation of the settlement proposal. Thus, his fees are not compensable as settlement expenses associated with the termination for convenience. See Fire Security Systems, Inc. v. General Services Administration, GSBCA 12890, 97-2 BCA 28,992, at 144,381. These costs may, however, be recoverable under the Equal Access to Justice Act (EAJA), assuming a timely application is filed. See 5 U.S.C. 504; Board Rule 135. Summary of Termination Settlement Award In conclusion, we award the following amounts pursuant to the termination for convenience settlement: Direct material $ 9,625 Direct labor 24,000 Other costs (payments to subcontractors) 49,546 (payment bond) 7,893 General and Administrative ` expenses 12,713 TOTAL COSTS 103,777 Profit -0- TOTAL 103,777 Settlement expenses 67,248 TOTAL 171,025 Less progress payments (59,370) NET PAYMENT DUE $ 111,655 Decision GSBCA 13250-C(12335), 13251-C(12384), and GSBCA 13252- C(12527) are GRANTED IN PART. GSBCA 13584 is also GRANTED IN PART. In settlement of its termination for convenience costs, Foremost is entitled to the amount of $111,655, with interest, as provided under the Contracts Disputes Act of 1978. We award the amount of $22,481.18 under the Equal Access to Justice Act. ____________________________________ CATHERINE B. HYATT Board Judge We concur: ______________________________ ____________________________________ ROBERT W. PARKER MARY ELLEN COSTER WILLIAMS Board Judge Board Judge