Board of Contract Appeals General Services Administration Washington, D.C. 20405 ___________________________ GRANTED IN PART: September 2, 1998 ___________________________ GSBCA 14442-TD HOSPITAL HEALTHCARE SYSTEMS, INC., Appellant, v. DEPARTMENT OF THE TREASURY, Respondent. James P. Rome, Wilmette, IL, counsel for Appellant. Michael Salyards, General Legal Services, Internal Revenue Service, Department of the Treasury, Dallas, TX, counsel for Respondent. BORWICK, Board Judge. Hospital Healthcare Systems, Inc., appellant, appeals from the decision of the contracting officer of the respondent, Department of the Treasury, concerning appellant's contract for supply of laser printers. Respondent had terminated the contract for convenience, resulting in appellant submitting a termination for convenience settlement proposal of $19,438.78 for alleged costs and profit. In her decision, the contracting officer determined appellant was due $2228.87. Appellant elected the small claims procedure pursuant to Rule 202. Consequently, this decision is issued by the panel chairman and is final and conclusive and shall not be set aside except in case of fraud. This decision shall have no value as precedent. The parties elected to submit the matter on the record pursuant to Rule 111. The record includes the appeal file, supplemental exhibits plus an affidavit submitted by appellant, and the parties' record submission memoranda. We conclude that appellant is entitled to $4904.09 as the allowable, substantiated termination for convenience settlement. Findings of Fact 2 On December 4, 1996, using the streamlined procedures of the Federal Acquisition Regulation (FAR) part 12.6, respondent issued solicitation TIRMS-97-Q-00666 as a small business set aside and commercial item acquisition for delivery of seventy rolls of laser printer labels, with 288,000 labels per roll. Appeal File, Exhibit 9. After respondent issued the solicitation, appellant entered into a consultant agreement with Rome & Associates (through Mr. James Rome) which provided: Per our discussion, it is agreed that the incentive percentage level for [the solicitation] will be 10% of the gross offering price of $69,622.00 You will become obligated for the foregoing sum in the event of an award payment [sic] as of the date of such award. Payment may be deferred until [appellant] receives payment(s) from the government. The term of this engagement is January through June, 1997, at which time the parties agree [to] negotiate continuation of the engagement upon mutually agreed terms and conditions. Appellant's Exhibit B.[foot #] 1 Appellant's president states that Rome & Associates: spent several hours guiding appellant in developing its bid response, including securing answers from respondent, to several technical matters which were necessary for appellant to prepare an offer fully responsive to the solicitation. Affidavit of Albert J. Paveza (Paveza Affidavit) (July 29, 1998) at 1 ( 4). Appellant's president also states that, before award, Rome & Associates "assisted appellant's development of responses to inquires from respondent about its capabilities." Id. at 2 ( 11). Appellant submitted its bid to supply the printer labels at $994.60 per roll, or $69,622 for the seventy rolls specified in the solicitation. Appeal File, Exhibit 9. Appellant received the contract, but it was not the definite delivery contract contemplated by the solicitation. Instead, the contract was a "requirements contract . . . with a minimum order limit of 3 rolls and a maximum order limit of 70 rolls." Id., Exhibit 28. ----------- FOOTNOTE BEGINS --------- [foot #] 1 Appellant's exhibits are attached to its record submission. ----------- FOOTNOTE ENDS ----------- 3 The contract ran from January 2 through September 30, 1997. Id. The contract contained the following specifications for the laser printer labels: -30" DIAMETER -6" CORE SIZE -TRACTOR FEED -FACE STOCK: 50#WHITE UNCOATED LASER COMPATIBLE CONTINUOUS PAPER ON 50#LINER -ADHESIVE: PERMANENT ACRYLIC -CARRIER WIDTH: 13" -LABEL SIZE: 3.9 X 15/16" -LABELS MOUNTED THREE WIDE ON CARRIER -LABELS PER ROLL: 288,000 -NO SPLICES -NO PERFORATIONS -SHIPPING REQUIREMENTS: ROLLS ARE TO BE SHRINK-WRAPPED WITH EACH ROLL STANDING IN A SUSPENDED STATE -LABEL MUST BE ABLE TO WITHSTAND THE APPROXIMATELY 200 DEGREES FAHRENHEIT TEMPERATURE GENERATED BY THE IBM 3900 PRINT SYSTEM -DELIVERY MUST BE WITHIN 15 DAYS OF THE VENDORS NOTIFICATION OF AN ORDER. -DEFECTIVE ROLLS WILL BE RETURNED AND MUST BE REPLACED WITHIN 15 DAYS OF NOTIFICATION. -LABELS MUST BE LASER QUALITY FOR NON-IMPACT PRINTERS. Appeal File, Exhibit 28. One feature that was not specified in the contract was the label roll's "winding direction," that is, whether labels came from the top or bottom of the roll. Id., Exhibit 29. The contract required appellant to provide a test run of ten thousand feet of labels before the first order was placed. Id., Exhibit 28. The contract incorporated by reference the short form termination for convenience clause FAR 52-249-1 (Apr. 1984), which provides: The Contracting Officer, by written notice, may terminate this contract, in whole or in part, when it is in the Government's interest. If this contract is terminated, the rights, duties, and obligations of the parties, including compensation to the Contractor, shall be in accordance with Part 49 of the Federal Acquisition Regulation in effect on the date of this contract. 48 CFR 52.249-1 (1997). 4 The dimensions of the labels and their arrangement on the roll were different than the labels appellant produces for other customers. Immediately after contract award, appellant purchased a special die to meet these requirements of the Government contract; this die is not useful in appellant's other business. Paveza Affidavit at 2 ( 8, 9). Instead of delivering ten thousand feet of label printers for the test, appellant delivered a full one-roll sample. Appellant's Exhibit I. On or about March 1997, respondent tested the sample roll and noted unacceptable instability and jamming when fed into the laser printers because the labels came off the top, rather than the bottom, of the roll as previous labels delivered by the predecessor contractor had done. Appeal File, Exhibit 29. Upon being advised of the problem, appellant stated it would purchase a device to reverse the winding direction of the labels on a roll and requested from respondent a $2500 contract modification to purchase and install the device. Respondent refused, considering the expense to be appellant's responsibility. At this time, respondent's officials reviewed its laser printer label inventory and questioned whether it needed to order any labels under the contract. Id. On July 9, respondent notified appellant of the convenience termination and requested appellant to submit an invoice for the one roll that appellant had delivered and that was in excess of the required sample quantity. Appeal File, Exhibit 33. On August 1, appellant retained Mr. James Rome to represent appellant in all matters regarding any claims against the Government arising under the contract at the rate of $150 per hour plus travel expenses and long-distance telephone, messenger, facsimile and copying costs. Appellant's Exhibit L. On October 1, appellant's attorney presented respondent with its termination for convenience settlement proposal as follows: 1. Tooling In-house design & engineering 12.75 hours @ $16.50/ hour $200.45 Die manufacture 2,189.00 Shipping of die 17.97 subtotal tooling 2,407.42 2. Post award requirement (sample roll) a. additional administrative time of president 20 hrs @ $25/ hour 500.00 b. sample roll cost (materials, set-up) run time (exclusive of profit) 961.20 c. design and fabricate custom suspension system for shipping sample, 10 hours @ $18/hour 180.00 d. shipping sample roll 342.67 e. profit of 10.8% 160.26 5 subtotal post award 1,644.16[foot #] 2 3. Outside consultant commission @ 10% 6,962.20 of gross offer price subtotal sales commission 6,962.20 4. Profit of 10.8% on contract value 7,500.00 subtotal profit 7,500.00 5. Preparation costs--settlement proposal a. outside legal 6hrs @150/hour 900.00 b. in house 1 hr @25/hr. 25.00 subtotal preparation costs 925.00 Total settlement proposal cost $19,438.78 Appeal File, Exhibit 35. For the special die, appellant's breakdown of costs shows one employee spending ten hours at 16.50 per hour "working on quotes, design and order of die." Appellant's Exhibit J. For the sample roll, appellant's breakdown of costs show another employee working ten hours at $18 per hour on packaging and arranging the sample roll for shipping at a cost of $180. The breakdown also states that appellant's president worked twenty hours at $25 per hour on "telephone calls with people ordering the labels; many calls with questions, arranging for sample run." The breakdown does not allocate time or expense among various activities. Appellant requested that the contracting officer either discuss the settlement proposal or issue a final decision. Appeal File, Exhibit 35. In response, on December 12, the contracting officer issued her decision which provided in pertinent part: The Contracting Officer's determination on the claim is payment of $2,228.87 which is reimbursement for the materials, attorney fees, and shipping of the sample roll. The shipping cost of $342.67 must be supported by presentation of the shipping receipt. Since this situation is a complete termination with no completed end items (ordered or delivered), profit is not allowed. Your firm's business decisions to purchase a new die or for consultation fees with your attorney in the amount of $6,962 are not allowable. Attorney fees ----------- FOOTNOTE BEGINS --------- [foot #] 2 This claimed subtotal is $500 less than the actual subtotal of $2144.13 for these figures. ----------- FOOTNOTE ENDS ----------- 6 to prepare the settlement proposal are however, allowable in the amount of $925.00 Appeal File, Exhibit 37. In its record submission, appellant amended its claim to seek profit only on the sample roll it had shipped to respondent. Appellant's Record Submission Memorandum at 5. In October 1997, in response to another procurement issued by respondent for laser printer labels, appellant submitted a proposal but was found ineligible. Appeal File, Exhibits 36, 37. Discussion General principles Recently we set forth general principles in determining allowable costs in termination convenience quantum disputes: 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 7 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). Foremost Mechanical Systems, Inc. v. General Services Administration, GSBCA 13250-C(12335), et al., 98-1 BCA 29,652, at 146,917-18. Appellant has the burden of establishing its entitlement to disputed items of quantum in termination for convenience settlement appeals. Herbert R. Button/Winfield, ASBCA 17281, 73-1 BCA 9780. We apply these principles to the specific items of cost claimed here by appellant in the order presented in appellant's termination for convenience settlement proposal to the contracting officer. Tooling This portion of the claim is for a total of $2407.42-- $200.45 for direct labor of in-house design and manufacturing, $2189 for the cost of the die manufacture itself, and $17.97 for shipping. The FAR part 31 considers the compensation of special tooling as a termination cost: (d) Loss of useful value. Loss of useful value of special tooling, and special machinery and equipment is generally allowable, provided 8 (1) The special tooling, or special machinery and equipment is not reasonably capable of use in the other work of the contractor; (2) The Government's interest is protected by transfer of title or by other means deemed appropriate by the contracting officer; and (3) The loss of useful value for any one terminated contract is limited to that portion of the acquisition cost which bears the same ratio to the total acquisition cost as the terminated portion of the contract bears to the entire terminated contract and other Government contracts for which the special tooling, or special machinery and equipment was acquired. 48 CFR 31.205-42 (d) (1997). Respondent argues that there is nothing in the record to indicate that the equipment was purchased for the contract and there is no documentation to substantiate the claimed cost of in- house design and manufacturing of the die. Finally, respondent maintains that it considers the die to be usable in appellant's business of printing labels. Appellant's president has submitted an affidavit that the die was purchased for this contract and is not usable for appellant's other work. Although the Government disputes that the die is not usable for other work, respondent has not shown that it knows appellant's business better than appellant's president. To appellant, the die has no useful value. Since appellant was recently rejected for a second Department of the Treasury contract for laser printer labels, for appellant, the prospect is remote of future Government business in which the die could be used. Additionally, in its record submission memorandum, appellant has stated its intention to pass title of the die to the Government if it is reimbursed for the die. There is no issue of apportionment here. Regarding the direct labor for the die, appellant substantiated $165 of its labor claim of $200.45. For the die, appellant is entitled to $2371.97 ($165+2189+17.97). Sample roll In her decision, the contracting officer allowed materials and shipping of the sample roll. The contracting officer did not mention the claimed labor for the sample roll. Respondent argues that appellant is not entitled to profit on the sample roll because the Government cannot be required to pay any amount higher than the stated contractual price, assuming it is obligated at all to pay for the sample roll. The FAR does limit contractors to the contract price for completed end items that are accepted and delivered or for completed end items that are 9 accepted, but not delivered. 48 CFR 49.205(a).[foot #] 3 The sample roll was not an end item that was delivered and accepted. Instead, it was a complete roll that the Government used in lieu of the test sample and which the Government found unsatisfactory because of the sample's characteristic--the winding direction--not specified in the contract. The FAR requires fair compensation for the work done and preparations made for the terminated contract, 48 CFR 49.201(a), as well as profit on that work, 48 CFR 49.202(a). Although the sample roll was unsatisfactory, it was not because of appellant's failure to comply with the contract specifications. Fairness thus requires that respondent pay for the material, labor and profit associated with manufacture and delivery of the sample roll. Appellant has substantiated its direct labor costs for the sample roll of $180 for designing and building the custom packing and shipping system for the sample roll; $961.20 for the sample roll itself; reasonable profit of 10.8%--$123.25--on the total of $1141.20, and shipping costs of $342.67. Appellant has not substantiated the claim of $500 for appellant's president as appellant has not allocated his time or expenses among various activities. For the sample roll, appellant is entitled to $1607.12. Appellant claims $6962 for consultant fees. Respondent argues that the fee is an unallowable contingency under the FAR and unreasonable. We disagree that the fee is unallowable; appellant, however, has not borne its burden of establishing that the fee was reasonable. The FAR provides in pertinent part: Costs of professional and consultant services are allowable subject to this paragraph and paragraphs (c) through (f) of this subsection when reasonable in relation to the services rendered and when not contingent upon recovery of the costs from the Government (but see 31.205-30 and 31.205-47). ----------- FOOTNOTE BEGINS --------- [foot #] 3 The provision provides: (a) Promptly after the effective date of termination, the [Termination Contracting Officer] shall (1) have all undelivered completed end items inspected and accepted if they comply with the contract requirements, and (2) determine which accepted end items are to be delivered under the contract. The contractor shall invoice accepted and delivered end items at the contract price in the usual manner and shall not include them in the settlement proposal. When completed end items, though accepted, are not to be delivered under the contract, the contractor shall include them in the settlement proposal at the contract price, adjusted for any saving of freight or other charges, together with any credits for their purchase, retention, or sale. ----------- FOOTNOTE ENDS ----------- 10 48 CFR 31.205-33(b) (emphasis added). While appellant's retainer with Rome & Associates is not a model of clarity, it is evident that its fee is not dependant upon appellant recovering the retainer fees from the Government, rather it is contingent upon other events--the award of the contract and subsequent payment of the contract price. This arrangement, therefore, is not an example of an unallowable contingent fee. Appellant, however, has not provided us information which would allow us to determine whether the fee is reasonable. Appellant's president states that Rome & Associates spent several hours working on its behalf during the pre-award phase of the procurement and held telephone conversations of unknown length with respondent on post-award issues.[foot #] 4 Since appellant has not enumerated the hours Rome & Associates worked on the contract, there is no basis for determining a reasonable amount. Hugo Auchter GmbH, ASBCA 39642, 91-1 BCA 23,645. Respondent concedes appellant's entitlement to the termination for convenience proposal fee of $925. In short, appellant has established that it is entitled to the following reimbursement for the terminated contract: special tooling--$2371.97, sample roll--$1607.12, and termination for convenience proposal preparation--$925, for a total of $4904.09, minus of course, any amount already paid to appellant by the contracting officer. Decision The appeal is GRANTED IN PART. Appellant is entitled to $4904.09 plus interest as provided in the Contract Disputes Act. __________________________ ANTHONY S. BORWICK Board Judge ----------- FOOTNOTE BEGINS --------- [foot #] 4 "Several" means "Being more than two or three but not many." Webster's II New Riverside University Dictionary at 1068 (1984). It is not possible to derive the number of hours Mr. Rome worked for appellant from this vague term.