_________________________________ GRANTED IN PART: October 31, 1997 _________________________________ GSBCA 14090 TEEMS, INC., Appellant, v. GENERAL SERVICES ADMINISTRATION, Respondent. Toni L. DeGasperin of Jones & Donovan, Irvine, CA, counsel for Appellant. Robert T. Hoff, Office of General Counsel, General Services Administration, Washington, DC, counsel for Respondent. Before Board Judges VERGILIO and GOODMAN. VERGILIO, Board Judge. The Board received this appeal on January 30, 1997, from Teems, Inc. The respondent, the General Services Administration, had terminated for convenience one of two items to be supplied under a requirements contract with Teems. Teems submitted a request for an equitable adjustment and a termination settlement proposal. Presently, Teems seeks $56,314, in addition to the $20,663.88 allowed by the agency. The Board concludes that Teems is entitled to recover an additional $15,603.57. Findings of Fact 1. Teems had produced nozzles under contract with the Government in 1985 through 1988; thereafter it was in the sign industry full time until 1993, when it submitted a unit price for nine of eighteen line items in response to a solicitation for sealed bids for requirements contracts. Exhibits 2 at 5-27 ( B), 130 at 1-2 ( 4) (all exhibits are in the appeal file). Teems was the low bidder on two items--a 1" and a 1.5" nozzle with shut-off, combination barrel. In July 1993, an agency quality assurance specialist (QAS) performed a plant facilities inspection at Teems' facility and concluded with the recommendation of "capable." Exhibit 8 at 5-8. Thereafter, the contracting officer deemed Teems to be non-responsible, because the agency rated Teems as financially incapable. Exhibit 96. In September, Teems obtained a certificate of competency (COC) from the Small Business Administration. Exhibit 97. 2. On October 15, 1993, the agency awarded Teems a contract for the two items. Exhibit 2 at 1. The unit price for the 1" nozzle is $13.49, with an estimated two-year quantity of 15,080. Id. at 23. The unit price for the 1.5" nozzle is $30.94, with an estimated two-year quantity of 3,960. Id. at 24. The contract contains a Changes clause (FAR 52.243-1 Changes-- Fixed-Price (AUG 1987)), a Termination for Convenience clause (FAR 52.249-2 Termination for Convenience of the Government (Fixed-Price) (APR 1984)), and a Default clause (FAR 52.249-8 Default (Fixed-Price Supply and Service (APR 1984)). Id. at 4; Exhibit 98 at 21, 23-25. 3. According to his declaration, the son of the principals of Teems accepted an offer from Teems in October to serve as the general manager of the contract at an annual salary of $52,000; he had performed in a similar capacity for Teems under an earlier contract to produce the same size nozzles. Exhibit 129 at 1 ( 3), 2 ( 6). However, as noted in Finding 27, elsewhere in the record Teems states that the general manager earned $500 per week. Exhibit 73 at 16. In mid-October he moved with his family to the location of Teems' facility, incurring moving expenses of $1,002.34. Teems reimbursed the full amount. Exhibit 129 at 2-3 ( 7). 4. In October and November, Teems moved to and set up a larger facility where Teems could adequately perform the contract and its existing business. Exhibit 129 at 3 ( 8). In early December, an agency QAS performed a plant facilities inspection at the larger facility and concluded with the recommendation of "capable." Exhibit 8 at 1-4. 5. The agency required first article samples under the contract. Exhibit 2 at 99-100 (First Article Samples); Exhibit 4. To provide the samples, Teems, which had produced nozzles under contract with the Government some years earlier, utilized machined pieces from past over-runs, and had other pieces produced by an applications technician, not employed by Teems, using a lathe in a showroom. Teems made other components, and assembled and inspected first article samples. Exhibit 129 at 16-18 ( 33-35). 6. Effective December 9, 1993, a bi-lateral modification made two changes to the contract, as requested by Teems. It altered the production and source inspection point identified in the contract. It also extended the delivery date for first article samples. In consideration for these changes, the agency accepted $150 from Teems. Exhibit 14. 7. On December 20, 1993, an agency QAS reviewed the initial set of three first article samples for each size nozzle. In accordance with the contract, Exhibit 2 at 99-100 (First Article Samples), one nozzle of each size was forwarded to the Forest Service for inspection and a determination as to acceptability. Exhibit 11. 8. In a letter dated January 14, 1994, Teems obtained formal notice from the agency of the rejection of first article samples for each nozzle. Enclosed with the letter were the Forest Service test reports which, for each item, identify failures in the construction, the materials, the flow rates, and nozzle marking. Exhibit 15 at 2, 3. A report states that the 1" nozzle failed the low flow straight stream test, with a rate of 9.75 gallons per minute (gpm), outside the acceptable range of 10 to 15 gpm, and passed the high flow straight stream test at the rate of 20 gpm, which is within the range of 20 to 30 gpm. Id. at 2. A report states that the 1.5" nozzle failed the low flow test--16.4 gpm, outside the acceptable range of 20 to 30 gpm--and failed the high flow test--20.1 gpm, outside the acceptable range of 60 to 80 gpm. Id. at 3. The record supports the determinations of failures with respect to construction, materials and marking. Exhibit 116. Despite a statement in a letter to the agency dated May 12, 1994, that, prior to submission of initial first articles, Teems had the samples successfully tested by an independent laboratory, Exhibit 23 at 1, the record does not contain any such test reports. All other reports for later tests referenced in the record were given to the agency during performance and are in the record. Exhibit 18 at 33-34. Declarations of Teems' personnel do not reveal a trip to or use of an independent testing laboratory until after the initial articles had been rejected by the agency. Exhibits 129 at 31 ( 70), 130 at 7 ( 16), 131. 9. By letter dated January 21, 1994, the agency provided Teems with a draft of contract modification two for its review. The modification extends the delivery date for first article samples, the initial samples having been rejected. The modification also obligates Teems to pay $150 to cover the costs of processing the modification and the costs incurred by the Forest Service as a direct result of reinspection and retesting (approximated at $700 per sample). For this latter item, the letter references contract clauses (Exhibit 2 at 4 (FAR 52.246- 2(e) (JUL 1985)) at 99 (GSAR 552.246-70(e) (DEC 1990)) under which the contracting officer may charge the contractor for additional costs of inspection or testing. Exhibit 16. Teems requested that samples be tested at an independent testing laboratory charging $90 per sample. The agency concluded that the Forest Service would conduct first article testing. Exhibit 17. 10. Teems expended time and effort in preparing new samples and in attempting to understand and correct the flow rate deficiencies determined by the Forest Service testing. In mid- February 1994, Teems submitted a second set of first article samples for each size nozzle. These were different, even if reworked, from the initial set. Included with the submission was a certification from an independent testing laboratory, dated February 15, 1994, that one of each item had passed the flow test requirements of the contract. Exhibit 18 at 12. The agency QAS concluded that it appeared that Teems had corrected all problems which caused the initial rejection by the Forest Service. Id. at 1. 11. On February 24, 1994, the Forest Service conducted flow rate tests on the second set of first article samples. The Forest Service concluded that the 1" sample was compliant and the 1.5" sample was not. Exhibit 108. During the testing and as reduced to writing in a letter to the agency dated March 1, 1994, Teems asserted that the Forest Service testing was invalid because it utilized uncalibrated equipment and an incorrect testing standard (i.e., "a biased definition of a straight stream"). Exhibit 20 at 1-3. 12. By letter dated February 28, 1994, the agency provided formal notice of rejection of the 1.5" nozzle sample. The nozzle failed the flow rate tests (high and low). Exhibit 110. 13. An administrative contracting officer (ACO) with the agency memorialized a conversation with Teems held on February 28, 1994. Teems named an individual with the Forest Service who told Teems that the equipment used to test the flow rate was not calibrated. Exhibit 111. 14. In a letter dated March 8, 1994, Teems informed the agency that the nozzle rejected by the Forest Service for not passing the flow rate tests had passed re-testing by an independent laboratory on March 7. Exhibit 114. 15. As reflected on a contract administration form dated March 10, 1994, the agency was aware that an individual from the Small Business Administration, who had witnessed the Forest Service testing, found that the setup used was not satisfactory. The report contrasts the test laboratory which Teems utilized for testing. Exhibit 117. 16. On March 11, 1994, the Forest Service informed the agency (an ACO) that the Forest Service had tested nozzles according to a wrong standard, utilizing amendment one to a standard rather than amendment two, which the contract specified. Exhibit 118. Both amendments post-date the earlier contract Teems had to produce similar nozzles, Finding 3. 17. On April 13, 1994, the agency terminated for default the right of Teems to proceed with the 1.5" nozzle portion of the contract. Exhibit 21 at 2. 18. In a letter to the agency dated May 12, 1994, Teems again asserted that the Forest Service had utilized non- calibrated equipment and the incorrect testing standard. Exhibit 23. 19. By letter dated June 28, 1994, the agency assessed $911.75 as the costs incurred by the Forest Service while inspecting and testing the second set of first article samples. Exhibit 24. 20. By letter dated November 3, 1994, Teems sought, for the 1" nozzles, a unit price increase of $1 for escalating aluminum costs and an extension of time for deliveries, said to have been made necessary by aluminum shortages. Exhibit 26. The agency rejected the price change request and sought information on specific purchase orders that were delayed. Exhibit 27. 21. By letter dated July 12, 1995, Teems requested an immediate and retroactive increase in price per unit ($13.49 to $14.75) from August 1, 1994, due to increases in prices and delivery times for aluminum. Exhibit 34. 22. Teems filed an appeal with the Board challenging the termination for default. On June 28, 1995, the agency unilaterally converted the termination for default to a termination for the convenience of the Government. Exhibit 33. Thereafter, the Board dismissed with prejudice the appeal. Teems, Inc. v. General Services Administration, GSBCA 12906 (Aug. 4, 1995). 23. On October 16, 1995, Teems submitted to the agency a request for an equitable adjustment and termination for convenience settlement proposal. Teems sought a total of $157,030, of which $62,943 are for an equitable adjustment based upon the changes clause and alleged costs agency actions caused Teems to incur in addition to those required under the contract, and $16,000 are for settlement expenses. Exhibit 36. 24. In response to an agency request for clarification and comments, Teems provided a new request for an equitable adjustment and termination for convenience settlement proposal, dated January 29, 1996. Teems sought a total of $89,606, of which $14,304 are identified as settlement expenses. Exhibit 38. 25. As noted in its brief, Teems now seeks a total of $76,977.88 or $56,314 in addition to the $20,663.88 already allowed by the agency. Teems Brief at 69. In addition to what the agency has allowed, Teems seeks unburdened labor costs of $9,504; overhead of 143% on these labor costs or $13,591; lathe and special tooling costs of $16,271; facility expenses of $2,200; general manager moving expenses of $117; material costs of $395; and outside testing costs of $2,055. On this total of $44,133, Teems seeks profit of 11.5% or $5,075. Additionally, Teems seeks reimbursement for the unrefunded costs for the Forest Service test, $456; for uncompensated settlement expenses of $2,813; and $3,837 for overhead and profit adjustments to costs allowed by the agency (the agency allowed 52% overhead and zero profit). Teems Brief, Attachments 1, 2, 3. Particular costs sought by Teems labor 26. Teems seeks reimbursement for labor hours expended by its two principals (a president and a chief financial officer) and its general manager. In pricing the contract, Teems treated such efforts as other than direct labor (which only accounted for actual lathe production time for each end item), Finding 57; it seeks reimbursement for particular efforts of the three individuals under its request for an equitable adjustment and termination settlement proposal. Teems has utilized contemporaneous time logs and some after-the-fact constructed estimates of hours expended on particular efforts. Exhibits 123, 129, 130, 131. 27. Teems maintains that the annual salary of the president and of the general manager was $52,000 and that of the chief financial officer was $25,000. Exhibit 131 at 1 ( 3). For the period in question, not one of the three individuals received the stated salary. Id. Teems contends that it lacked the resources (short of borrowing money) to make salary payments, particularly with the lack of anticipated funds from the here-disputed contract. However, Teems states that it remains obligated to pay the individuals when its financial circumstances permit. Id. at 1-2 ( 3-4). Teems bases its request for compensation on unburdened hourly rates of $18.75 for both the president and the general manager and of $12.02 for the chief financial officer, although none was paid on an hourly basis. Exhibit 38 at 4, 8, 11. Teems has not demonstrated that any individual received compensation equivalent to the associated hourly rate. Agency auditors reviewed payroll records and accepted the proposed labor rates. Id. at 11. The record does not indicate how this conclusion of the auditors can be reconciled with statements in the audit report made regarding the calculation of the overhead rate based upon a fiscal year--a total overhead pool of $126,341, and "officer's salary" of $36,840. Exhibit 67 at 15. Further, in response to agency inquiries regarding the settlement proposal, Teems explains its hourly rate of $18.75 for the general manager and president with the statement that, per week, the general manager earned $500 and the president $1,000, and $18.75 is the average. Exhibit 73 at 16. The declaration by a purported expert that it is appropriate to utilize a single hourly rate based upon the average salary of each, Exhibit 132, Attachment A, is neither persuasive nor convincing; for each individual, there exist alleged hours and rates which could be multiplied. Utilizing an average hourly rate simply distorts costs incurred. 28. From the contract, Teems utilizes the unit pricing and the estimated number of 1" nozzles (15,080 units at $13.49 = $203,429.20) and 1.5" nozzles (3,960 units at $30.94 = $122,522.40) to allocate 37.5% ($122,522.40/($203,429.20 + $122,522.40)) of particular efforts noted below to the terminated portion of the contract. 29. Teems, which had not produced nozzles for a number of years, states that its president expended 81.5 hours and its chief financial officer 12 hours in bid preparation--that is, making the determination to submit and formulating bids on nine items. Exhibits 123, 130 at 3-4 ( 7-8), 131 at 5 ( 13). Allocating 37.5% of these efforts to the terminated portion of the contract, Teems seeks $623.62. These bid preparation efforts include time expended related to the seven line items on which Teems unsuccessfully bid. Exhibit 130 at 4 ( 8). The ACO deemed four hours to be reasonable for these efforts, with the rationale that he contacted a manufacturer (of unspecified name and size) of 1.5" nozzles and was told that no more than two hours would have been spent in bid preparation on the terminated item, such that fifteen hours would be reasonable for the two items, of which 26.4% would be allocated to the terminated item, based upon a calculation utilizing the actual number of units ordered and the time Teems utilized and would have utilized on its lathe to produce each item. Exhibit 94 at 13 and Attachment 7. 30. Teems states that, after bid opening and prior to efforts in obtaining a COC, its president and its chief financial officer each expended at least 10 hours preparing to perform the contract and planning the change of facilities to a larger space. Exhibit 130 at 6 ( 12). For these efforts Teems seeks $115.39. 31. Teems states that its president expended 61 hours and its chief financial officer 37 hours in obtaining the COC. Exhibit 130 at 12 ( 13). Allocating 37.5% of these efforts to the terminated portion of the contract, Teems seeks $595.69. The ACO relates that the Small Business Administration has indicated that a contractor would spend, at most, twenty hours obtaining a COC. Allocating 26.4% to the terminated portion of the contract, the ACO deemed six hours as a reasonable amount of time for the efforts. Exhibits 57, 94 at 14. 32. Teems seeks reimbursement for 14 hours its president and 125 hours its general manager expended in making arrangements for the change of facilities, moving equipment, and preparing the larger facility. Allocating 37.5% of these efforts to the terminated portion of the contract, Teems seeks $977.35. Teems Brief at 40. The general manager states that he spent approximately 210 hours on move-related efforts, of which 125 hours relate to tasks directly in furtherance of the contract. Exhibit 129 at 6 ( 15). 33. Teems seeks $773.44 for efforts of its general manager in obtaining the lathe, allocated at 37.5%. Teems Brief at 18. The general manager of Teems declares that from November 19 through December 20, 1993, he expended approximately 110 hours researching, selecting, and negotiating an agreement for the new lathe to be used to perform the contract. Exhibit 129 at 10 ( 22). He also says that he signed a purchase order on November 19, after a couple of weeks of study and negotiations, although Teems later canceled the purchase order. Id. at 8-9 ( 20). These statements contrast with information provided by then counsel for Teems, who asserted in a response to an agency inquiry: "Although arrangements to acquire the machine were made prior to award, the new machine was not ordered until December 20, 1993, shortly after award of the contract to TEEMS." Exhibit 47. The ACO references the unnamed manufacturer he contacted, who noted that no more than two hours would be necessary to research the necessary equipment and tooling if a firm had previously furnished the same item to the Government, and concludes that two hours is a reasonable amount of time for this activity for the 1.5" nozzle. Exhibit 94 at 14. 34. The general manager declares that, in initially tooling and programming the lathe, he spent approximately 30 hours for the 1" nozzle and 75 hours for the 1.5" nozzle. For those efforts relating to the terminated nozzle, Teems seeks $1,406.25. Teems Brief at 42 ( 1) and Attachment 2. 35. To complete the initial set of first articles for the 1.5" nozzle, Teems states that its president expended 13.8 hours and its general manager 62.5 hours. For these efforts, Teems seeks $1,430.63. Exhibit 130 at 6 ( 15). 36. Teems states that after the first rejection and prior to the second rejection, the three individuals expended efforts in attempting to understand the bases for the rejections and to engineer and correct the alleged deficiencies. Teems states that its president expended 4 hours on the 1" nozzle. This amounts to $75. Regarding the 1.5" nozzle, Teems claims that its president expended 118.5 hours, its general manager 162 hours, and its chief financial officer 38.5 hours. The total for all of these claimed hours at the given rates is $5,797.15, although Teems totals the figures to $3,797.15. Exhibits 129 at 35 ( 78), 130 at 8 ( 17), 131 at 5-6 ( 15); Teems Brief at 43. 37. Teems states that after the second rejection of the 1.5" nozzle, the three individuals expended additional efforts prior to the termination for default. Efforts relate to reviewing a video tape of the Forest Service testing, meeting with various individuals regarding the Forest Service testing and independent testing, conducting additional research, testing and development regarding the nozzle, and drafting materials to express concerns to the agency. Teems claims that its president expended 81 hours, its general manager 64 hours, and its chief financial officer 47 hours, for a total of $3,283.69. Exhibits 129 at 37 ( 84), 130 at 8-9 ( 18), 131 at 6 ( 16); Teems Brief at 43. 38. The total of all the various labor hour calculations is $15,003.21, although Teems uses the figure of $13,003.21. Teems Brief, Attachment 2. Utilizing the hours as allocated by Teems for the indicated efforts, the total compensable hours for the president is 279.55, the chief financial officer is 107.625, and the general manager is 451.625. 39. The ACO has, in reliance on an unnamed manufacturer's input, deemed various of the requested hours to be unreasonable; however, the claim presented some of the hours and efforts somewhat differently than, and without supporting declarations as, has been done in the course of these proceedings. Exhibit 94 at 14-17. The ACO justifiably concluded that Teems had not supported its labor costs, given variations in alleged salaries and hourly rates, and payroll records failing to support payments of salaries (as contrasted with profit distributions), and proceeded to make an award recognizing an entitlement to reimbursement. Id. at 16-17, 24-29. The ACO summarized his calculation of the amount awarded for the above costs, $3,498.98: 1) 10% of Teems' incurred salary costs for July, August and September of 1993 for the limited work the contractor performed before the award of the contract for precontract and bid and proposal costs ($3,841.75 X 10%=$384.18); and 2) 20% of Teems' incurred salary costs for October 15, 1993 through April 15, 1994 for all other activities alleged to have been performed in relation to the 1-1/2" nozzle ($15,573.99 X 20% = $3,114.80). Coincidentally, multiplying the adjusted hours for line items 1 through 16 (315 hours) by Teems' $12.00 as-bid rate yields a total of $3,780.00 which is only $281.02 more than the amount awarded and deemed reasonable. Exhibit 94 at 17 (footnote omitted). lathe costs 40. Teems obtained a lathe to produce the 1" and 1.5" nozzles. Teems asserts that it needed a lathe to produce the 1" nozzles through March 1996. Exhibit 129 at 16 ( 31). It seeks an allocable portion of lathe costs for 27 months (January 1993 through March 1996, inclusive): $ 99,318 lease (5 years) $ 7,697 sales tax $107,015 or $1,784 per month ($107,015/60) 32.7% allocable to 1.5 inch nozzle $1784 x 32.7% = $583.37/month $15,751 27 months x $583.37/month 520 special tooling $16,271 lathe costs Teems seeks Teems Brief at 48. This amount differs from costs Teems sought earlier. Exhibits 30 at 9 (sought $26,666, "1/3 of actual cost of machine purchased for contract"), 72 at 16 (sought $13,992, 1/3 of costs allocable to the 1.5" nozzle over twenty-four months). Concluding that it was not necessary for Teems to obtain the lathe, the agency has disallowed recovery of lathe costs. Exhibit 94 at 3. With a reference to FAR 31.205-42(c)(2) and (d)(3), Teems calculates the allocation factor utilizing the unit prices, Finding 2, and actual number of units ordered, Finding 56. 41. Teems states that it purchased the lathe through a lease agreement, Exhibit 129 at 15 ( 29), although the equipment lease agreement states: "NO PURCHASE OPTION AVAILABLE HEREUNDER." Exhibit 62 at 1. The agreement, dated January 3, 1994, reveals that Teems made a down payment of $2,000, leaving $77,230, plus sales tax. Id. at 1, 6. The sales slip indicates a sales tax of $6,140.32 on the $79,230 amount, that is, at the rate of 7.75%. Id. at 4. The principal amount would be repaid with interest through sixty monthly payments of $1,621.97, with payments to begin July 15, 1994. Id. at 2, 6-7. Thus, by March 1996, Finding 40, Teems would have made not twenty-seven, but twenty- one, payments. 42. While Teems contends that the lathe was not reasonably capable of use in its other work, Exhibit 129 at 15-16 ( 29- 30), Teems has not demonstrated that the lathe was special equipment, that is, tooling of a specialized nature. The evidence is to the contrary. Teems attempted to win other contracts for which it apparently would have utilized the lathe. Exhibits 12, 19, 22. Further, Teems' pricing of the contract makes no direct allocation of lathe costs, Finding 57; any recoupment of costs would come through its categories for burden, tooling cost, and profit. Purchasing the lathe for use on the one contract only is not justified through the pricing. facility moving costs 43. Teems incurred costs of $5,868 relating to changing facilities in order to perform the requirements contract. Exhibits 125, 131 at 4 ( 11). Teems seeks $2,200 (37.5% of its expenses). Concluding that it was not necessary for Teems to change facilities, the agency has disallowed recovery. Exhibit 94 at 3. costs to move general manager 44. Teems' general manager declares that he incurred moving expenses in the amount of $1,002.34, of which Teems paid the entire amount. Exhibit 129 at 2-3 ( 7). With a reference to supporting documentation, Teems' chief financial officer declares that Teems incurred and paid expenses in the amount of $1,002.34 to move its general manager. Exhibit 131 at 4-5 ( 12) (referencing Exhibit 124). As recommended by an agency auditor, Exhibit 67 at 13, the agency allowed $281, based upon $1,061 of adequately supported costs and an allocation factor of 26.5% (based on units ordered and production time). Teems seeks reimbursement based upon $1,061, although documentation in the record does not support that figure, at an allocated rate of 37.5%. Thus, Teems seeks an additional $117. material costs 45. In its January 1996 settlement proposal, Teems sought $1001 as material costs incurred in the production of its first articles (which included additional units for destructive test purposes). Exhibit 38 at 11. In response to agency questions concerning this amount, Teems states that it was able to support only $624.79 of the amount. Exhibits 65, 73 at 14 ( 7(a)-(h)). 46. The agency has allowed $229.22, taking various deductions largely based upon the assumption that Teems produced only a total of twelve complete 1.5" nozzles for first article purposes. Exhibit 94 at 10-11. Teems has since explained in declarations that it incurred each of the costs for which it seeks compensation and that it made various additional components and did destructive testing in its attempt to correct the alleged deficiencies of its product. Exhibit 129 at 31 ( 70), 32 ( 72), 33 ( 74). Teems seeks an additional $395. outside testing costs 47. Teems seeks reimbursement of $2,055 in addition to the $180 allowed by the agency for outside testing costs. Teems Brief at 55-56. 48. With a date of February 15, 1994, Teems was invoiced for $360 from an independent testing laboratory for testing four fire nozzles. Exhibit 64 at 3. However, the certification of test results indicates that two nozzles were tested. Id. at 5. Teems' explanation that the "invoice was for retesting 2 ea. 1" nozzles and 2 ea. 1-1/2" nozzles which the Forest Service had earlier improperly rejected as a result of running its tests on uncalibrated equipment" is not supported by the record, because the retesting occurred after the date of the invoice. Exhibit 73 at 15; Finding 14. The agency has allowed $180 of these charges. Exhibit 94 at 12. 49. Teems utilized the testing laboratory for consulting purposes (four hours on March 7, 1994, for $500) and for research and development (ten hours total, five hours on each of March 7 and 22, 1994, for a total of $750). Exhibit 127. For these services Teems incurred costs of $1,250. Exhibits 64, 131 at 9 ( 28). As invoiced with these hours, Teems also incurred costs of $625 from the laboratory for engineering and test setup. These charges total $1,875. The agency has disallowed recovery for these requested amounts. Exhibit 94 at 11. overhead 50. Teems seeks to recover overhead on its rates for the direct labor hours of its president, chief financial officer, and general manager, which Teems totals to $13,003.21, Finding 38. Teems utilizes an overhead rate of 143%. Exhibit 38 at 14; Teems Brief at 56. Teems notes in its settlement proposal that a significant deviation exists from its regular accounting procedures and policies, namely, certain costs have been reclassified as direct costs. Exhibit 38 at 12 ( 5). Regarding its calculation of the overhead rate, Teems explains in its settlement proposal that it utilized a single indirect expense pool which includes indirect wages, payroll taxes and other fringes, telephone, rent, supplies, insurance and other administrative expenses, but which excludes unallowable costs. Id. at 14 ( 18). The declaration of an accountant, who helped formulate the Teems settlement proposal, does not add enlightenment on the calculation, or convincingly establish a basis for applying the 143% rate. Exhibit 132. 51. Agency auditors made adjustments to the allowable overhead proposed by Teems. While Teems is said to have utilized direct labor costs as its allocation base, the auditors used costs of goods sold. The auditors derived a rate of 52% to be applied to the cost of the goods sold. Exhibit 67 at 11, 15-16. The agency has used that rate applied to the allowable costs of first articles. Exhibit 94 at 17-18. profit 52. Teems seeks profit of 11.5% on its requested costs. The agency has allowed no profit, deeming Teems to be in a loss position. Exhibit 94 at 4-5, 22. Forest Service testing 53. The agency had charged Teems $911.75 for Forest Service retesting, Finding 19. In resolving this item the agency has stated a rationale: "Only half of that amount was for the retesting of the 1-1/2" nozzle. The other half was for the retesting charges for the 1" nozzle, which is not a part of this settlement" and allowed recovery of $455.88. Exhibit 94 at 9. Teems seeks the remainder under the Changes clause. settlement expenses 54. Teems seeks $2,813.22 as settlement expenses, in addition to the $13,670.18 allowed by the agency, for a total of $16,483.40. Teems Brief at 15; Exhibit 94 at 8. This total consists of $12,383.35 agreed upon by Teems and its then legal counsel--an amount settled upon to reflect a reduction from billed costs for legal and accountant fees charged by counsel for termination settlement purposes only. Exhibit 131 at 9 ( 27). Teems also seeks compensation of $4,100.05 for efforts of its president, chief financial officer, and general manager, at the hourly rates of $18.75, $12.02, and $18.75, respectively, plus "an overhead-abated rate" of 36%, pursuant to FAR 31.205- 42(g)(B)(iii). Teems Brief at 68. For the period May 16 through December 18, 1995, Teems asserts that its president expended 47 hours, its chief financial officer 42 hours, and its general manager 15 hours, in preparing and presenting settlement proposals. Teems also claims that in March, June, and July 1996, efforts were expended in preparing for and participating in an audit, and in preparing responses to requests for additional information. The hours expended for these efforts by the president are 28.5, the chief financial officer are 47.75, and the general manager are 12.75. Exhibits 129 at 37-38 ( 85-86), 130 at 10-11 ( 23-24), 131 at 8 ( 25-26). 55. The agency has not specifically addressed the amount requested by Teems in its submission of January 29, 1996, Exhibit 38. Rather, the ACO focused upon expenses claimed as of October 10, 1996, as adjusted by him for double billing and unallowable costs. After various findings, supporting his conclusion that hours allegedly expended and rates applied are not reasonable or are not supported by submissions from Teems, the ACO simply reduces by 40% the amount of the adjusted October claim for settlement expenses and allows $13,670.18. Exhibit 94 at 5-9. Additional information 56. The agency placed nine orders, for a total of 4,095 units, against the backup contract to satisfy its 1.5" nozzle requirements during the contract period. Exhibit 60. The agency placed orders for 19,340 1" nozzles under its contract with Teems. Exhibit 128. 57. Teems has submitted an "as bid" sheet to indicate how it priced the 1.5" nozzles. In addition to materials, Teems priced labor to operate the lathe at $12.00 per hour (which roughly equates to the $500 weekly salary stated, at times, to be that of the general manager, Finding 27), outside services, burden, tooling, and scrap at .01% (although this scrap figure is not used as a cost or a credit). Per unit, the tooling cost is $.20, the burden is $9.00, and the anticipated profit is $3.34. Exhibit 66 at 2. The record does not specify what the tooling cost item represents--whether, for example, it is recurring lathe costs for equipment, oil, and coolant, such as Teems claims as material costs for producing first articles, or the particular additional lathe equipment needed to produce the 1.5" nozzle, such as Teems claims as a lathe cost, Finding 40, or a combination thereof. The burden rate is discussed only in an after-the-fact document which relates the burden solely to general and administrative (G&A) expenses as follows: The G&A amount is identified as $167,063, which is converted into a per minute rate of $1.34, which is divided by three projects (the 1" nozzles, the 1.5" nozzles, and the signs) so as to determine a per minute per project rate. That amount is then multiplied by 20 minutes (how long the lathe would be used for the 1.5" nozzle production) to arrive at the burden per unit. Exhibit 66 at 3. The "as bid" sheet for the 1" nozzle indicates 10 minutes of lathe time, and a labor costs of $2.00; however, the burden is $5.35--an amount which is inconsistent with the explanation of the burden calculation. Id. at 4. 58. For the 1.5" nozzles, given the actual requirements of the Government during the contract period (4,095 units), Finding 56, and the unit price amount Teems allotted to burden ($9.00), tooling ($.20), and profit ($3.34), Finding 57, Teems would have taken in at most $51,251.30 (4,095 x $12.54) above its costs for material, labor, and outside services, because Teems' actual material costs likely would have been higher than its projections, Findings 20, 21, and the record does not suggest that its other costs would have been less than projected. Teems here seeks in excess of $56,000 for labor, overhead, lathe costs, material costs, and moving expenses said to be expended prior to incurring other expenses (and overhead) for the production of actual end items. All such costs would have to be absorbed by Teems. Based upon Teems' calculations this was not a profitable contract, even if one views the approximate $9,080 of labor costs said to be incurred after rejection of the first articles as costs reasonably incurred because of the erroneous testing and rejection, and compensable under the Changes clause. 59. On January 30, 1997, the Board received this appeal from Teems. Teems has elected the accelerated procedure for resolution. 41 U.S.C.  607(f) (1994); Rule 203. Discussion Teems seeks compensation as an equitable adjustment and under the Termination for Convenience clause. Equitable adjustments The initial first articles did not comply with contract requirements, such that the determination to reject each was correct. Finding 8. Teems has not demonstrated that the initial articles actually complied with the flow rate requirements of the contract. The manner of production, Finding 5, makes errors in the process a possible cause for flow rate failures, as does the change in the applicable standard, Finding 16. Efforts and costs expended in completing compliant first articles fall within Teems' obligations under the contract and do not constitute a change. With the submission of the contractually compliant second set of first articles, including supporting tests from an independent laboratory, Teems satisfied its contractual obligation to provide compliant first articles. The agency's rejection of the 1.5" nozzle was contrary to the contract, and remains unexplained given that the agency was aware of the invalidity of the Forest Service tests used to substantiate the rejection. Findings 13-16. But for the improper rejection, Teems personnel would not have expended their subsequent efforts. Finding 37. The reasonableness of the hours and the calculation of associated costs is discussed below (under termination for convenience), Teems having shown entitlement to an equitable adjustment for these efforts. Teems also incurred costs from an outside testing laboratory, which it would not have incurred had the agency not improperly rejected the 1.5" nozzle after the second submission. Finding 49. These costs, $1,875, are reasonably reimbursable as an equitable adjustment. Additional testing costs sought of $180 have not been justified. Teems paid $911.75 for the second Forest Service tests; the agency has reimbursed $455.88. Findings 19, 53. The retesting was conducted with uncalibrated equipment and utilizing the incorrect standard. The contract does not obligate Teems to have paid for improper, non-conclusive testing. Accordingly, Teems is entitled to $455.87. Termination for convenience After a termination for convenience, a contractor may recover its costs incurred in the performance of the work terminated, including initial costs and preparatory expenses allocable thereto, as well as a fair and reasonable profit on that amount, unless it appears that the contractor would have sustained a loss on the entire contract had it been completed. FAR 52-249-2 (Finding 2). Teems expended time and money in obtaining the contract, in preparing its business to fulfill the contract, and in completing compliant first articles. The contract does not separately price or compensate Teems for first articles; under the termination for convenience clause, associated costs are compensable as initial costs and preparatory expenses. According to its as-bid sheets, Teems would absorb such costs and be compensated for them only as an element of burden. Because the requirements of the Government did not change because of the termination--the contract always obligated the agency to order its requirements under the contract, short of a termination--one can calculate the portion of costs allocable to the 1.5" nozzle by determining the reimbursement for burden Teems would have received had the contract not been terminated. Teems allocated $5.35 to each of the 19,340 1" nozzles, and $9.00 to each of the 4,095 1.5" nozzles, so the percentage is calculated as follows: 4,095 x $9.00 = 26.26% (19,340 x $5.35) + (4,095 x $9.00) The allocation used by Teems, based upon the total unit costs of the goods, is not reflective of how Teems allocated its initial costs--Teem's allocation is not tied to material or labor costs to produce any given unit. Similarly, the method adopted by the agency, which utilizes lathe time to produce articles, has not been shown to be related to the burden costs. Finding 29. Teems is not the manufacturer contacted by the ACO and perhaps does not operate as an average (much less sophisticated) business. However, the agency contracted with Teems. Whether efficient or not in its operations and actions, Teems produced acceptable first articles for the 1.5" nozzles, and but for the termination would have recouped its start-up costs had the contract gone to completion. While the hours may seem excessive for particular efforts, Teems has met its burden of establishing that its president, chief financial officer, and general manager expended time as indicated. The agency's determinations to reduce the claimed hours lack reasonable support in the record. How much time a particular manufacturer may expend is not determinative of how much time Teems spent in accomplishing any given task. Findings 29, 33, 39. The amount of time Teems expended is within the range of reasonableness, given the circumstances in which Teems found itself. For efforts from bid preparation through lathe purchasing, the president expended 166.5 hours, the chief financial officer 59 hours, and the general manager 235 hours. Findings 29-33. Using the 26.26% factor, the hours allocable to this contract are 43.7 for the president, 15.5 for the chief financial officer, and 61.7 for the general manager. Teems is also entitled to recover for its efforts expended in producing the various sets of first articles for the 1.5" nozzle. For these efforts, the president expended 132.3 hours, the chief financial officer 38.5 hours, and the general manager 299 hours. Findings 34-36. Teems is also entitled to recover for its efforts expended after the improper second rejection, as an equitable adjustment as discussed above. For such efforts, the president expended 81 hours, the chief financial officer 47 hours, and the general manager 64 hours. Finding 37. The total compensable hours, therefore, are 257 for the president, 101 for the chief financial officer, and 424.7 for the general manager. The record developed makes it difficult to determine the appropriate compensation for these efforts. Teems has not priced the hours in a credible manner. It has used various salaries and hourly rates, none of which has been supported. Similarly, the composite rate adopted by the agency auditors is divorced from actually incurred costs for the period in question. Moreover, salaried employees may well work in excess of forty hours per week for no additional compensation, such that calculating an hourly rate for any of the three individuals would overcompensate Teems. Precision cannot be accomplished. However, hourly rates of $16.00 for the president, $10.00 for the chief financial officer, and $12.00 for the general manager, are reasonable to compensate Teems. Teems has not justified adding a burden to the rates. Using these rates and the above-determined hours, the total compensation for the hours is $10,218.40. The agency has allowed reimbursement of $3,498.98 for labor costs. Finding 39. Teems is entitled to the difference: $6,719.42. lathe costs Teems seeks to recover $16,271 as lathe costs, which includes $520 Teems describes as "special tooling." Finding 40. While the record does not support a conclusion that the lathe or particular components are "special tooling" under regulatory definitions, 48 CFR 31.205-40(a), 45.101 (1993), Teems would not have obtained the lathe but for use on the contract for the 1" and 1.5" nozzles. Finding 40. Although the record makes impossible any precise calculation of allocable and recoverable lathe costs, Teems is entitled to a fair and reasonable recovery given that it would have recouped some of the lathe costs incurred to perform the contract had the contract not been terminated. Teems anticipated using the lathe for 10 minutes (1/6 of an hour) for each 1" nozzle and 20 minutes (1/3 of an hour) for each 1.5" nozzle. Given the requirements of the Government, the 1.5" nozzle would have utilized 29.75% of the lathe time (4,095/3 divided by (4,095/3 + 19,340/6)). Findings 55, 56. Further, the lathe had residual value at the end of the contract, the lathe was used less than it would have been had the 1.5" nozzles been produced, and Teems did not have to make adjustments to produce parts for the different nozzles during the period. Teems has not shown what the value of the lathe was or would have been, or that the value was other than substantial. Without more, the Board will award Teems 30% of the 29.75% reasonably allocable to the 1.5" nozzle, given that Teems should recoup some money. Through March 1996, Teems would have expended approximately $38,831 ($2,000 down payment + (21 months x $1,621.97 monthly payments) + $2,250 sales tax + $520 particular tooling). Findings 40, 41. Based upon the above conclusions, Teems is entitled to $3,465.67. facility move Teems seeks to recover $2,200 as an allocable portion of its $5,868 costs to move to a larger facility in order to perform the contract. Finding 43. Teems has established that the new contract precipitated the move; larger facilities were required. Findings 4, 31. Teems has not justified its allocation rate. Rather, the 26.26% determined above, based upon burden rates calculated by Teems, is here utilized. Accordingly, Teems is entitled to $1,540.94. costs to move general manager Teems seeks additional compensation for the move of its general manager. Its calculations are premised upon costs the agency's auditors found to be adequately supported and upon attributing a greater percentage of the move to the terminated portion of the contract than did the agency. Finding 44. Despite the conclusion of the agency's auditors, Teems has not demonstrated that it incurred more than the $1,002.34 costs for the move which it paid. Teems also has not demonstrated entitlement to a greater percentage, or total dollar amount, than allowed, given that the general manager did not do work solely relating to the nozzle contract. Finding 32. material costs Teems has reasonably supported its claim for material costs not compensated by the agency. Findings 45, 46. Teems is entitled to the $395 it seeks. overhead Teems seeks overhead on its labor costs. As determined above, Teems has not justified recovery of overhead on the rates established by the Board as fair compensation. Teems has not established that the rate used by the agency was less than fair and reasonable for the costs allowed. profit A contractor is entitled to fair and reasonable profit on costs incurred in the performance of terminated work unless it appears that the contractor would have sustained a loss. FAR 52- 249-2 (Finding 2). It appears that Teems would have sustained a loss had the 1.5" nozzle portion of the contract not been terminated. Finding 57. Accordingly, no profit is allowed. settlement Teems seeks $2,813.22 in addition to the $13,670.18 allowed by the agency. Finding 54. Teems seeks to recover for costs incurred through legal counsel and for in-house efforts. The $12,383.35 figure reached between Teems and its then legal counsel is a reasonable amount for those settlement efforts involved. Finding 54. Teems is entitled to recover that amount. Teems has established, also, that in working on the termination settlement its president expended 75.5 hours, its chief financial officer 89.75 hours, and its general manager 27.75 hours. Finding 54. As concluded above, the hourly rates of $18.75 and $12.02 utilized by Teems have not been justified. Rather, the rates established above are applied to the hours; similarly, no overhead or burden is to be added to this amount. For these efforts Teems is entitled to a total of $2,438.50 (= ($16 x 75.5) + ($10 x 89.75) + ($12 x 27.75)). The settlement expenses total $14,821.85. The agency has allowed $13,670.18. Teems is entitled to the difference: $1,151.67. Decision The Board GRANTS IN PART the appeal. Teems is entitled to recover a total of $15,603.57, plus interest as provided by statute, as an equitable adjustment and as compensation under the Termination for Convenience clause. _______________________ JOSEPH A. VERGILIO Board Judge I concur: _____________________ ALLAN H. GOODMAN Board Judge