__________________________ DENIED: September 16, 1997 __________________________ GSBCA 13843 PONDEROSA PACKAGING CORPORATION, Appellant, v. GENERAL SERVICES ADMINISTRATION, Respondent. Sam Zalman Gdanski, Suffern, NY, counsel for Appellant. Michael D. Tully, Office of General Counsel, General Services Administration, Washington, DC, counsel for Respondent. Before Board Judges PARKER, WILLIAMS, and VERGILIO. VERGILIO, Board Judge. On September 11, 1996, Ponderosa Packaging Corporation filed this appeal involving a requirements contract with the respondent, the General Services Administration, to supply boxes. After paying for a number of boxes, the agency concluded that the goods were defective--they failed to comply with design or performance specifications--and the contractor had failed to provide the contract-required inspections, such that the contract-required certifications and statements of inspection were inaccurate. The goods were returned. In accordance with the contractor's request, the agency did not insist on the replacement of the goods, but permitted the contractor to refund the amounts paid. The contractor has failed to repay the amount it received under the contract. The agency has claimed $113,490.87, plus interest. The contractor disputes the agency claim for repayment. The contractor failed to satisfy its contractual obligations. The agency acted within its contractual rights in insisting that the goods be returned and in demanding a recoupment of payments made. The contractor misunderstands its contractual obligations when it insists in this appeal that the agency was obligated to accept the delivered goods which failed to comply with contractual specifications. This position contrasts with the contractor's request during performance that it be permitted to refund amounts paid in lieu of replacing defective goods with contract-compliant goods. The Board denies the appeal. The agency is entitled to recover, with interest, all amounts paid for the purchase orders at issue. Findings of Fact The contract 1. The agency awarded to Ponderosa a firm, fixed-price requirements contract, for the period March 1, 1995, through February 29, 1996, to supply fiberboard boxes--for fire tools and shipping. The contract has thirteen line items for boxes defined by eight national stock numbers to be shipped to one or two of three locations. Exhibit 1 (all exhibits are in the appeal file). The contract identifies design and performance specifications with which each box must comply. Id. at 7-14. 2. The contract sets forth particular requirements for the contractor to abide by with respect to the inspection system and facilities, as well as inspection and receiving reports. Exhibit 1 at 16-17 (GSAR 552.246-70, Source Inspection by Quality Approved Manufacturer (MAR 1994)). The contract clause addresses "quality deficiencies": (1) Notwithstanding any other clause of this contract concerning the conclusiveness of acceptance by the Government, any supplies or production lots shipped under this contract found to be defective in material or workmanship, or otherwise not in conformity with the requirements of this contract within a period of 12 months after acceptance shall, at the Government's option, be replaced, repaired or otherwise corrected by the Contractor at no cost to the Government within 30 calendar days (or such longer period as the Government may authorize in writing) after receipt of notice to replace or correct. The Contractor shall remove, at its expense, supplies rejected or required to be replaced, repaired or corrected. When the nature of the defect affects an entire batch or lot of supplies, and the Contracting Officer determines that correction can best be accomplished by retaining the nonconforming supplies and reducing the contract price by an amount equitable under the circumstances, then the equitable price adjustment shall apply to the entire batch or lot of supplies from which the nonconforming item was taken. (2) If supplies in process, shipped, or awaiting shipment to fill Government orders are found not to comply with contract requirements, or if deficiencies in either plant quality or process controls are found, the Contractor may be issued a Quality Deficiency Notice (QDN). Upon receipt of a QDN, the Contractor shall take immediate corrective action and shall suspend shipment of the supplies covered by the QDN until such time as corrective action has been completed. The Contractor shall notify the GSA quality assurance office, within 5 workdays, of corrective action taken or to be taken to permit onsite verification by a Government representative. Shipments of nonconforming supplies will be returned at the Contractor's expense and may constitute cause for termination. Delays due to the issuance of a QDN do not constitute excusable delay under the Default clause. Failure to complete corrective action in a timely manner may result in termination of this contract. (3) This contract may be terminated for default if subsequent Government inspection discloses that plant quality or process controls are not being maintained, supplies which do not meet the requirements of the specification are being shipped, or there is failure to comply with any other requirement of this clause. Id. at 17 ( (d)). Performance 3. The agency issued purchase orders for various of the boxes, which were delivered to Government facilities. Exhibits 11, 18, 19. 4. During a meeting held on May 26, personnel from the agency and the box supplier (a subcontractor selected by the contractor) discussed a contract requirement pertaining to four of the eight national stock numbers under the contract. The requirement dictates the parameters for the fluting of the corrugated fiberboard. The box supplier indicated that it lacked the ability to produce the fiberboard required under the contract for the four items and that it would seek a deviation. Exhibit 7. 5. Also on May 26, the agency issued a notice of inspection, rejecting six already-shipped orders because the boxes deviated from the solicitation requirements, as discussed in the meeting. Exhibits 9, 11. 6. By letter dated May 31, the contractor sought a deviation from the fluting requirement for four of the box-types under the contract. Exhibit 10. By memorandum dated June 6, the agency's Chief, Engineering Group, recommended to the agency's contract administrator that the requested deviation be denied: While the specification may be old, the methods of packaging and transportation that are used with these boxes and the tools they are intended to pack have not changed, we must assume until the Forest Service has the opportunity to review the requirements that the original reasons for the . . . requirements also have not changed. In addition, there was a request by another manufacturer made during the solicitation of this contract to allow [the same deviation now requested], which was denied; therefore, we cannot now allow the winning contractor to supply what was specifically not allowed in the solicitation. Exhibit 14. As noted in the memorandum, during the solicitation process, in response to a company, the agency had denied a request to alter the fluting requirement in the same manner as here at issue. Exhibit 24. In the letter, the agency notes that compared to the proposed fluting, the solicitation-specified requirement "offers a superior column crush strength, provides improved protection and extra stacking strength. These features are important due to the stacking practices in the Fire Caches." Id. 7. By letter dated June 9, the agency formally denied the contractor-requested deviation. Further, with respect to the six particular orders, Finding 5, pursuant to the source inspection by quality approved manufacturer clause, Finding 2, the agency was requiring the contractor to arrange for the disposition of the goods and to make timely replacement. Exhibit 15. 8. By letter dated July 6, the agency informed the contractor that the agency had evaluated and denied the request to accept non-conforming goods in consideration for a 5% price reduction. Enclosed with the letter was contract modification one, accepting a contractor-proposed offer of a price reduction in exchange for extending the delivery date of four purchase orders; the contractor stated that it could supply boxes without altering the class of fluting. Exhibits 22, 23. 9. In August, the supplier ensured that boxes delivered under six purchase orders were removed from a Government facility. Exhibits 31, 34, 38. 10. By contract modification two, the agency accepted a contractor-proposed offer of a price reduction in exchange for extending the delivery date of one purchase order. Exhibit 36. In contract modification three, the agency again accepted a contractor-proposed price reduction in exchange for extending again the delivery date of the order. Exhibit 40. For each extension, the price negotiation memorandum specifies that the contractor is to supply boxes complying with the class of fluting required under the contract. Exhibits 35, 39. 11. With a date of November 13, the agency issued a quality deficiency notice informing the box supplier that shipped material failed a contract-specified edge crush test and pointing out that the contract requires a certification that all tests have been performed and the specified quality requirements have been met. Exhibit 51. 12. Agency personnel visited the supplier's facility on November 21. Exhibit 56. An agency audit report, dated November 21, identifies numerous deficiencies and areas of non-conformance in the quality procedures of the box supplier. The report also indicates that boxes do not comply with particular design (separate from fluting) and performance requirements. Exhibit 52. 13. As noted in a memorandum dated December 6, in the latter half of November, non-compliant boxes were still passing inspections by the supplier, with the supplier providing certifications of compliance, although test and inspection reports failed to indicate that all contract-required tests had been performed and passed. Exhibit 55. 14. On quality control facility surveillance forms dated December 14, the agency notes that boxes delivered to the agency under fourteen purchase orders failed the supplier's testing for one particular contract requirement (relating to column crush, something other than fluting). Also, the reports reveal that there continued to exist overall problems with the quality control system. The agency placed the shipments on hold, such that the boxes would not leave the agency facility. Exhibit 57. 15. The agency issued a cure notice dated December 19. In the letter, the agency reiterates for the contractor the history of problems under the contract with the supplier and quality control system. The letter itemizes existing deficiencies, and notes that unless the deficiencies are cured within thirty days of receipt of the letter, the agency may terminate for default the contract. Exhibit 58. 16. On December 28, agency personnel visited the site of the supplier. The quality assurance manager for the supplier informed the agency that not all tests had been performed and not all inspection reports had been completed. The agency concluded that the quality control procedures were still inadequate with no formal plan existing to correct deficiencies. Exhibit 60. 17. On quality control facility surveillance forms dated January 2, 1996, the agency notes that boxes delivered to the agency under two purchase orders failed the supplier's testing for a particular performance (column crush) requirement. Also, the reports reveal that overall problems with the quality control system continued to exist; the agency placed the shipments on hold. Exhibit 62. 18. On quality control facility surveillance forms dated January 12, the agency notes that boxes delivered to the agency under six purchase orders failed the manufacturer's testing for a particular performance (column crush) requirement. Further, the reports specify that overall problems with the quality control system continue. Exhibit 65. 19. In response to the cure notice of December 19, 1995, Finding 15, by letter dated January 18, 1996, the contractor informs the agency that it had completely revised its quality control manual and procedures; it addresses particular areas of concern to the agency. Regarding the material on hold, the contractor states that it is "unable to provide complete proof of conformance." It proposes, in lieu of picking up and returning the goods, a twenty percent price reduction. Exhibit 66. A second letter with a date of January 18, is simply a redated version of the letter dated May 31, 1995, Exhibit 10; Finding 6, in which the contractor asks that the agency modify the contract to permit a different fluting design. Exhibit 66. 20. By letter dated February 15, the agency informed the contractor that it rejects the price reduction offered to accept non-conforming goods and that the supplier has informed the agency that the manufacturer has no traceability or lot control for delivered goods. Further, the agency notes that it denies the requested change in specifications, the same request it had denied previously. Exhibit 74. Also, with a reference to and quotation from the source inspection by quality approved manufacturer clause, Finding 2, the agency instructs the contractor to provide written disposition instructions for goods delivered under the contract. The agency references the twenty-one purchase orders at issue in the appeal, and associates with each a quantity of goods. Exhibit 74. 21. By early July, all goods delivered under the twenty-one purchase orders here at issue were removed from the Government facilities. Exhibits 93, 95, 96. 22. In a letter dated July 18, 1996, to the contractor, the agency identifies (by purchase order, national stock number, quantity and value) the boxes returned under the contract. The total "value" of the returned boxes is $113,490.87. Exhibit 100. The letter also specifies: In response to our request for replacement of the above defective boxes, you indicated that your firm prefers reimbursement to the Government rather than replacement of the defective material. Please forward your payment, for the amount cited above . . . . Id. The letter also specifies that if payment is not received within thirty calendar days from the date of the letter, the contractor shall be obligated to pay interest, at a rate established in accordance with statute. Id. Subsequent testing and additional information 23. The contractor states in its complaint that its subcontractor neglected to perform the appropriate test reports, Complaint at 2 ( 6), although it maintains that the items called for were manufactured fully in accordance with the contract specifications, id. ( 7). 24. In an attempt to support its position that compliant goods were delivered, the contractor had what purports to be a testing company perform some tests on some boxes from two lots of goods rejected by the agency. The company issued reports revealing that for one lot, the goods were not manufactured according to design and performance specifications of the contract, while for the second lot, the goods did not comply with a design specification of the contract. Exhibit 118 (letters dated Dec. 16, 1996). 25. Although the agency modified the contract pursuant to contractor requests to reduce the contract price for particular orders in consideration for extending the delivery dates, Findings 8, 10, the contractor admits that the agency paid the stated amounts, totaling $113,490.87, Finding 22, for the returned goods. Exhibits 117 at 10-11 ( 6), 118 at 3 ( 6). Discussion This dispute involves the agency's rejection of goods, non- conforming because they fail to meet design and performance specifications established in the contract and because they were proffered without the requisite inspections having taken place and without a quality control system in place as required by the contract. The agency appropriately rejected the goods and required that they be returned. As revealed by the contemporaneous tests and the subsequent contractor-initiated tests, the goods themselves fail to meet contract design and performance specifications. Findings 1, 5, 7, 11, 12, 14, 17, 18, 24. As an independent basis for rejection, the goods had not passed a quality inspection procedure in conformity with the contract requirements--a shortcoming recognized by the contractor and supplier; thus, the rejection and return of the goods was appropriate. Findings 2, 11- 19, 23. The agency acted in accordance with the terms of the contract in rejecting the non-conforming goods. The contractor had failed to satisfy its contractual obligations. In seeking repayment of money paid, and not delivery of compliant goods, the agency opted for a contractual resolution short of a default termination, which accorded with the contractor's request. Findings 2, 22. The contractor has no right to retain money received for non-conforming goods. The agency is entitled to repayment of all money paid for returned goods, with interest as permitted by statute and contract. The contractor is not entitled to the relief it seeks--forcing the agency to accept the rejected goods, even at a reduced price. The competition underlying the procurement was for boxes made to conform to design and performance characteristics and for a quality control system complying with specifications. A reformation of the contract, as proposed by the contractor, would make nugatory the competition which occurred; no other potential contractor had the opportunity to submit prices on boxes satisfying characteristics and inspection procedures different from those in the solicitation. The agency is not contractually obligated to pay for non-conforming goods. A contrary result would mean that a contractor could produce non-compliant goods which an agency is bound to accept; that is, the contractor would establish its own sole-source contract for different goods. Such is not the law. The contractor also misunderstands its contractual obligations and those of the agency regarding the fluting requirement. It is not material that the agency altered the specification for subsequent contracts. The contract at issue established a fluting requirement; the contractor was obligated to comply with the requirement. Further, in seeking time extensions, the contractor expressly indicated that it would comply with the requirement. Findings 8, 10. The contract obligates the contractor to deliver and the agency to accept compliant products. It would have been inappropriate to alter the fluting requirement, given that, for the underlying competitive procurement, the agency expressly informed a box manufacturer that it would not consider altering the fluting requirement, as subsequently requested by the contractor. Finding 6. The agency, not the contractor, establishes the requirements to be satisfied. Decision The Board DENIES the appeal. The agency is entitled to recover, with interest, all amounts paid for the purchase orders at issue. ___________________________ JOSEPH A. VERGILIO Board Judge We concur: ____________________________ ___________________________ ROBERT W. PARKER MARY ELLEN COSTER WILLIAMS Board Judge Board Judge