_______________________________________________________ GSBCA 10118, 10119 DENIED; GSBCA 10120 GRANTED IN PART: September 30, 1993 _______________________________________________________ GSBCA 10118, 10119, 10120 AIR SPEED TOOL COMPANY, Appellant, v. GENERAL SERVICES ADMINISTRATION, Respondent. Kenneth K. Takahashi of Takahashi & Associates, Washington, DC, counsel for Appellant. Thomas Y. Hawkins, Office of Regional Counsel, General Services Administration, San Francisco, CA, counsel for Respondent. Before Board Judges LaBELLA, HENDLEY, and VERGILIO. VERGILIO, Board Judge. Air Speed Tool Company, appellant, had two contracts with the General Services Administration (GSA), respondent. The agency terminated for default the contractor's right to proceed under one of the contracts. Separately, after determining that the contractor had delivered non-compliant goods under specific purchase orders issued under the two contracts and after the agency had returned the items because the contractor had failed to take corrective action, the agency terminated for default the contractor's right to proceed under the specified purchase orders. The agency also claimed entitlement to $142,977.58 for payments previously made to the contractor for the returned items. Through a filing dated June 18, 1989, the contractor appealed the terminations for default of its contract, and of its purchase orders issued under the two contracts, as well as the agency's claims for reimbursements. The Board concludes that the agency properly terminated for default the contract and the purchase orders. With respect to the contract, the contractor lacked a quality control system acceptable under the contract and was producing unacceptable items. With respect to the purchase orders, the contractor had delivered items not compliant with performance requirements. Contrary to the terms of the contract, the contractor failed to replace the items or take other appropriate corrective action. The agency has failed to substantiate its claim for reimbursement in excess of the contract item price of the items returned. Therefore, the amount of the agency claim for reimbursement is reduced by $532.56 in one appeal. Accordingly, the Board denies two of the appeals, and grants in part the one appeal under which the agency claim is reduced. The contractor must pay the Government $142,445. Findings of Fact The 622 contract 1. With an effective date of May 8, 1987, GSA awarded to Air Speed an indefinite-quantity contract (the 622 contract) for pneumatic ratchet sets (item 16) at the unit price of $155. Appeal File, Exhibit 1.[foot #] 1 Although no supporting contract documentation exists in the record, apparently the contract was later modified to include an indefinite-quantity award for pneumatic portable hammers (item 15)--no party suggests otherwise. Id. 2. The contract required the ratchet wrench to operate at a minimum of 280 rpm, and that the air consumption at no load be a maximum of 16 SCFM. Each set was to include seven hexagonal sockets (from 3/8" to 3/4" in increments of 1/16") and two spark plug sockets. Appeal File, Exhibit 1, Amendment 4 at 2-3; Respondent's Exhibits 5, 6. The parties agree that the hexagonal socket openings were required to satisfy gauging requirements, while the spark plug sockets had to satisfy differently specified tolerances. Id. and e.g., Appeal File, Exhibits 12, 20, 24. 3. The contractor identified in the contract its Los Angeles, California facility as the production and inspection points for the ratchet sets (item 16) and hammers (item 15). Appeal File, Exhibit 1 at 31. 4. The contract's Quality Approved Manufacturer Agreement (QAMA) clause, E-FSS-539, requires that the contractor maintain a quality control system which complies with all requirements of Federal Standard 368A and that an acceptable quality control ----------- FOOTNOTE BEGINS --------- [foot #] 1 An appeal file is associated with each appeal. For ease of reference, unless otherwise stated, citations are to exhibits in the appeal file of GSBCA 10118. Parallel citations to identical exhibits in the multiple appeal files are not indicated. ----------- FOOTNOTE ENDS ----------- system must exist throughout the contract period. Appeal File, Exhibit 1 at 31; Respondent's Exhibit 1. Under the clause, the Government reserves the right to inspect prior to acceptance at all times and places including the point of manufacture. Moreover, "During the contract period, a Government representative will periodically select samples of material produced under the current contract for Government verification inspection and testing." Finally, Notwithstanding any other provision 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 and workmanship, or otherwise not in conformity with the requirements of the 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 . . . after receipt of notice to replace or correct. Appeal File, Exhibit 1 at 31; Respondent's Exhibit 1. Additionally, "This contract may be terminated for default if subsequent Government inspection discloses that plant quality and progress controls are not being maintained, subspecification material is being shipped, or for failure to comply with any provisions required by the QAMA." Appeal File, Exhibit 1 at 32. 5. The contract incorporates clauses from the FAR (Federal Acquisition Regulation): 52.246-2 Inspection of Supplies--Fixed- Price (Apr. 1984) ("If the contractor fails to promptly remove, replace, or correct rejected supplies that are required to be removed or to be replaced or corrected, the Government may . . . terminate the contract for default.") and 52.249-8 Default (Fixed-Price Supply and Service) (Apr. 1984). Id., Exhibit 1 at 37 and Exhibit 2, GSA Form 3507 at 8 ( 42) and 11 ( 51). Performance under the 622 contract 6. By letter dated November 8, 1988, eighteen months into the contract, the contractor informed the agency that it was moving its manufacturing facility from Los Angeles to San Carlos, California. The letter stated that San Carlos would become the points of manufacture and inspection effective December 1, 1988. The contractor requested that the contract be amended accordingly. Appeal File, Exhibit 9. 7. In response, by letter dated November 16, 1988, the agency notified the contractor that it would inspect the San Carlos facility "to determine if this plant has the capability to perform in accordance with the terms and conditions of the contracts." The production/inspection points remained unchanged, as did the delivery due dates for purchase orders. Appeal File, Exhibit 10. 8. On December 1 and 21, 1988, the agency inspected the San Carlos facility. The agency "found this plant not fully operational, and not capable of performing in accordance with contractual requirements." The agency provided the contractor with a cure notice, dated January 12, 1989. The notice specified unacceptable conditions, indicated that the contractor had ten calendar days from receipt to cure the conditions, and specified that failure to cure could result in a termination for default. Appeal File, Exhibit 12. At no time in 1989 did the contractor have an acceptable place of production or inspection under the contract. Transcript at 87-89. 9. While the contractor was attempting to change its production and inspection points, the agency instituted lot-by- lot inspections of the ratchets and hammers. Appeal File, Exhibit 14; Transcript at 17, 19. 10. By letter dated February 4, 1989, the contractor responded to the rejection by the agency of some of its ratchet sets inspected at Los Angeles. Appeal File, Exhibit 20. (The agency had concluded that certain socket openings were not within tolerances measured with go/no-go gauges. Id., Exhibits 16-18.) The contractor contended that the agency used the improper standard for testing conformance--Federal Standard 346C not 346A. Moreover, the contractor asserted: "Since nominal nut opening sizes are acceptable on 2 [the two spark plug sockets] of the 9 [sockets], it would most certainly follow that the extremely close tolerances specified in Fed. Std. 346C are not really required on any of the sockets, for the end use envisioned for this item." The letter continued: In view of the above inconsistencies in the contract requirements and the fact that we know the quality of products supplied will meet all practical application tests, we would recommend that a deviation be granted on these orders to permit the same nut end opening requirements to be applied to all sockets as are required for the 5/8" and 13/16" [spark plug socket] sizes. In reviewing the specification defects discussed above, we would suggest that this contract be ammended [sic] either to specifiy [sic] ANSI 107.2-1975 and Fed. Std. 346C dated April 28, 1976 or that the nut end openings on all sockets be nominal sizes as with the spark plug sockets. Without this clarification, and since receiving this 308 rejection, we have no alternative but to change our normal sampling procedures as used in the past to 100% inspection, to preclude the possibility of future rejections. . . . We have replacement sockets on order to insure that all referenced orders can be reworked to pass your present inspection procedures and will be able to submit all orders for acceptance by February 17, 1989. Id., Exhibit 20. 11. By letter dated March 21, 1989, the agency responded to the contractor's letter dated February 4. After noting that a contract modification had been issued to incorporate Federal Standard 346C in lieu of 346A, the letter stated that after reviewing the standards, the agency "found that both editions have the same gaging requirements for the . . . sockets" at issue. Appeal File, Exhibit 24. The contractor has not demonstrated that this conclusion is inaccurate; namely, the two standards have the same gauging requirements for the relevant sockets. 12. The contractor responded to the inspection reports underlying the agency's letter of March 21, stating in part: We have sampled all seven regular sockets from the rejected lot . . . and find that they will pass the hex. opening requirements if subjected to the same standards as required of the spark plug sockets. It is totally inconsistent to accept one set of standards on the spark plug sockets and reject the regular sockets when they also will meet these same standards. . . . . . . . The fact that the sockets as supplied will perform practically in the intended use, should be considered in our request for contract modification. The 3/8" and 3/4" sockets that refused to accept the go gage are still large enough to fit on a 3/8" or 3/4" nut. The 9/16" sockets that accepted the no-go gage will still drive a 9/16" nut efficiently, and most importantly without introducing any safety hazard. We feel that the requested modification is entirely consistent with the inherent flexibility of this item description. . . . . We do not feel that these orders should be terminated since the items furnished meet all practical requirements and secondly, items conforming to all technical requirements are immediately available. The reason for the initial non-conformable is because the standard sampling procedures would not detect these discrepancies. Only by inspecting 100% can we insure that a given sample will conform. Appeal File, Exhibit 29. 13. A separate letter dated March 21, 1989, from the agency to the contractor concerns four purchase orders issued under the contract, for which delivery, acceptance and payment had occurred. Based upon complaints received, the agency took and inspected samples from the orders. Appeal File, Exhibit 26. The agency's inspections revealed one deficiency applicable to all four orders: the ratchet wrenches operated at a speed below the required 280 rpm minimum. Id., GSBCA 10120, Exhibits 5-8. The agency found other deficiencies in some sets, such as wrenches becoming inoperable during testing and hexagonal socket openings failing the gauging tests. Id. Referencing the warranty provision of the contract, Finding 4, the letter directed the contractor to replace the defective material, with the contractor to offer replacement material within thirty calendar days. The letter alerted the contractor: "Failure to offer replacement material within the time frame specified above, or failure to offer material conforming to all requirements of the contract, may result in the termination of your right to proceed with the performance of the aforementioned purchase orders" under the termination for default clause. Appeal File, Exhibit 26. 14. By letter dated April 1, 1989, the contractor responded to the letters of March 21. Regarding the agency's conclusion that the wrenches failed to meet the minimum speed requirement, the contractor suggested that there was an error in the agency's testing procedures. "All tools produced are tested 100% for rpm and always run in excess of 400 rpm when tested with a strobotac [a registered name of an electronic stroboscope]." Further, the letter stated that "even the slightest load applied to this type of tool will immediately slow it down. . . . . The only accurate method to measure the rpm is with a strobotac. We do not believe these tools would fail this test if tested correctly." Appeal File, Exhibit 30. Despite the assertion that tools had been 100% tested, the contractor has introduced no such results into the record in support of its contention. Testimony of the contractor's president suggests that, at best, the contractor tested using mechanical means and extrapolated results to exceed the 280 rpm minimum requirement. Transcript, Vol. 2 at 192. 15. In the letter of April 1, the contractor reiterated its position regarding the hexagonal sockets. It contended that the requirement could easily be waived without adverse effect on the usability of the ratchet set. The go- no go requirement is only applicable to 7 of the 9 sockets supplied. The other 2 spark plug sockets have no such stringent dimensional requirements. Since this test is not required on the spark plug sockets, [it] is obvious that it is not an "absolute" necessity on the 7 regular length sockets in order to obtain commercially suitable sockets. Appeal File, Exhibit 30. The contractor noted its willingness to offer "a modification to this effect on these orders. This solution would be far more cost effective than to endure the time lost for the return and rework of these orders for this feature." Id. The contractor further offered to replace the tools found inoperable during testing. Id. 16. A laboratory test record dated April 3, 1989, shows that a sample from a purchase order of pneumatic hammers was tested in March 1989. Appeal File, Exhibit 35. The sample and order were rejected because a tool would not operate. Id., Exhibit 34. Previously, in February 1989, samples from the purchase order had been inspected and rejected--the pneumatic hammers failed to operate, totally or other than intermittently, at the prescribed pressure and chisels were of unacceptably low hardness. Id., Exhibits 21, 22. In a letter dated February 28, to the agency, the contractor stated that it had retested the lot and concluded that all tools operated at the prescribed pressure. The contractor confirmed the findings of low hardness; it explained that previously rejected material had become commingled during the move to San Carlos. The contractor submitted new chisels which were tested in March 1989. Id., Exhibit 23. No documentation in the record supports the contention of the contractor that the pneumatic hammers it ultimately supplied under the purchase order were compliant with the contract requirements. 17. By letter dated May 4, 1989, the agency terminated for default the contractor's right to proceed with the performance of the 622 contract. Appeal File, Exhibit 36. Noting the importance of manufacturing standards in the industry, and the need for interchangeable and properly fitting parts, the letter rejected the proposed deviation for hexagonal socket standards. The termination stated that the contractor had consistently delivered ratchet sets and pneumatic hammers failing to conform with contractual requirements. "These failures demonstrate to the Government that your firm is unable, or unwilling, to take the necessary steps to operate an effective Quality Control System," as required by the Quality Approved Manufacturer Agreement, clause E-FSS-539, Finding 4. 18. By letter dated June 2, 1989, the agency terminated for default the contractor's right to proceed with the performance of four specific purchase orders for ratchet sets, Finding 13. Appeal File, GSBCA 10120, Exhibit 12. The letter states that in conducting its tests the agency, indeed, had utilized the contractor-suggested methods of testing the speed of the ratchet wrenches. Noting the importance of manufacturing standards in the industry, and the need for interchangeable and properly fitting parts, the letter rejected the proposed deviation for hexagonal socket standards. The letter specifies that the contractor "has failed to offer replacement material to the Government within the time frame prescribed in Clause E-FSS-539. [Finding 4.] Therefore, you have failed to deliver within the purview of" the termination for default clause, Finding 5. 19. The letter terminating for default the four orders further states, with references to check numbers and dates of payment, that the agency had previously paid for items received under the four orders. The total quantity stated for the four orders is 718. The letter requires, as a Government claim, that the contractor reimburse the Government $111,512.58--718 sets at $155.31 each. Appeal File, GSBCA 10120, Exhibit 12. The record does not indicate any basis for seeking reimbursement in excess of the unit price, $155.00, Finding 1. 20. The agency supports the claim with a bill of lading which indicates, by purchase order number, the quantity of ratchet sets returned to the contractor. Respondent's Exhibit 4. Unexplained in the record are the discrepancies between the purchase order quantities and the number of items referenced per purchase order in the bill of lading. The bill of lading shows that under two purchase orders more items were returned than were purchased, under one purchase order the agency returned the same number of items as purchased, and under one purchase order, two fewer items were returned than purchased. Id., Appeal File, GSBCA 10120, Exhibit 12. The record supports the agency's claim to the extent that 716 (not 718) ratchet sets were returned under the terminated purchase orders. The 629 contract 21. The agency awarded Air Speed a fixed-price, definite quantity contract--the 629 contract--for ratchet sets (468 sets at the unit price of $155 in the amount of $72,540). The effective date of the award is June 2, 1987. Appeal File, GSBCA 10119, Exhibit 1 at 1. 22. The ratchet set is described in terms identical to those in the 622 contract, Finding 2. Appeal File, GSBCA 10119, Exhibit 1 at 2-3. In the contract, the contractor identifies its San Carlos facility as the production point and the Los Angeles facility as the inspection point. Id. at 8. The Quality Approved Manufacturer Agreement clause, Finding 4, and the Inspection of Supply and Default clauses, Finding 5, are identical in the two contracts. Appeal File, GSBCA 10119, Exhibits 1, 2. 23. A laboratory test record dated January 31, 1989, indicates that of four sets sampled from one purchase order, one wrench utilized more than the prescribed maximum air consumption, the speed of another wrench was below the prescribed minimum, and one socket from an unspecified set was improperly gauged; all other items tested passed. Appeal File, GSBCA 10119, Exhibit 6. A laboratory test record dated February 10, 1989, indicates that all wrenches sampled from another purchase order failed to operate at the minimum speed; all other tests were successful. Id., Exhibit 5. 24. By letter dated March 21, 1989 (the third letter with that date), the agency informed the contractor that the agency had determined that 203 ratchet sets previously delivered (and paid for) under the 629 contract were defective. These ratchet sets had been shipped under two purchase orders in quantities of 176 and 27. The letter specifies the defects found during inspection, Finding 23. Also, the letter states that the Quality Approved Manufacturer Agreement clause, Findings 4, 22, obligated the contractor to replace the defective material. The contractor was reminded that it was "required to offer the replacement material within thirty (30) calendar days, or such longer period as the Contracting Officer may authorize in writing, after the receipt of this letter." Further, Failure to offer replacement material within the time frame specified above, or failure to offer material conforming to all requirements of the contract, may result in the termination of your right to proceed with the performance of the aforementioned purchase orders, pursuant to [the Termination for Default clause]. Appeal File, GSBCA 10119, Exhibit 3. 25. By letter dated April 1, 1989, the contractor responded to the letters of March 21. The contractor's response is set forth in Findings 14 and 15. Additionally, the contractor offered to replace the tool which exceeded the air consumption requirement. Appeal File, Exhibit 30. 26. By letter dated May 18, 1989, the agency terminated for default the contractor's right to proceed with the performance of the two purchase orders. Appeal File, GSBCA 10119, Exhibit 10. The letter states that in conducting its tests the agency, indeed, had utilized the contractor-suggested methods of testing the speed of the ratchet wrenches. Noting the importance of manufacturing standards in the industry, and the need for interchangeable and properly fitting parts, the letter rejected the proposed deviation for hexagonal socket standards. The letter specifies that the contractor "has failed to offer replacement material to the Government within the time frame prescribed in Clause E-FSS-539. [Finding 4.] Therefore, you have failed to deliver within the purview of" the termination for default clause, Finding 5. 27. The letter terminating for default the two orders further states, with references to check numbers and dates of payment, that the agency had previously paid for items received under the orders. The total quantity stated for the two orders is 203. The letter requires, as a Government claim, that the contractor reimburse the Government $31,465--203 sets at $155. Appeal File, GSBCA 10119, Exhibit 10. 28. The agency supports the claim with a bill of lading which indicates, by purchase order number, the quantity of ratchet sets returned to the contractor. The document indicates that 203 sets were returned under the two purchase orders. Respondent's Exhibit 4. Other information Sampling 29. Under the Quality Approved Manufacturer Agreement clause, the agency samples ratchet sets and pneumatic hammer sets for inspection. In selecting sample sizes and in determining the acceptable quality levels (that is, the number of failures in a sampling which justified rejection of the lot), the agency relied upon the agency's Quality Assurance Handbook and Military Standard 105. Transcript, Vol. 2 at 170, Vol. 3 at 20-25. Some samples taken by the agency were smaller than those dictated in these guidelines. Appellant's Exhibit 4; Appeal File, GSBCA 10120, Exhibits 3, 5, 7, 8. However, in every instance, a sufficient number of sets was unacceptable to justify rejection had the proper sample size been taken. For example, for a lot of 236 sets, 8 samples should have been taken; 2 failures would support rejection of the lot. Appellant's Exhibit 4. Thus, although a sample of four sets was tested (rather than eight), the failure of three wrenches to operate at the minimum speed, justified rejection of the lot. Appeal File, GSBCA 10120, Exhibit 8. Testing--socket openings 30. The agency utilized go/no-go gauges to test hexagonal socket openings for compliance with the contractual requirements. The testimony of the agency demonstrates that this testing complied with the terms of the contract and accepted practices within the industry. Transcript at 104-05; Vol. 2 at 48. Allegations by the contractor that testing instruments were improperly calibrated, and that testing conditions were unacceptable are not supported by the record. The contractor's contemporaneous letters do not state that the contractor's testing demonstrated compliance; rather, the contractor requested a deviation from the requirements, and stated that the sockets complied with less stringent standards. Findings 10, 12, 15. Testing--wrench speed 31. In testing the ratchet wrenches, the agency used an electronic stroboscope. Appeal File, Exhibit 33; Transcript, Vol. 2 at 46-47. The agency tested the free-running speed of the ratchet; that is, no load was placed on the ratchet during testing. Transcript, Vol. 2 at 46-48, 50, 65-77. The record demonstrates that the agency properly conducted the testing and that the results are reliable. Id. The testing conformed to the testing procedures recommended by the contractor during the course of performance. Findings 14, 18. 32. At the hearing on the merits, the president of the contractor testified that the speed should have been tested with a load, and that such testing would have resulted in greater speeds than no-load testing produced. Transcript, Vol. 3 at 92. Although this witness testified as "an expert in the area of ratchet and impact sockets," the testimony was not persuasive or credible. No test results were introduced in support of the testimony. The individual appeared ready to testify to whatever would support the latest theory of recovery. Id. at 171-72. The Board discounts the testimony of this individual as not credible. Testing and conclusions 33. The record reveals that the testing and the acceptance/ rejection of ratchets and hammers occurred in accordance with the terms of the contract and methodologies accepted within the industry. 34. By letters dated June 16 and 18, 1989, the contractor appealed the terminations for default of the 622 contract (GSBCA 10118), the two purchase orders under the 629 contract (GSBCA 10119), and the four purchase orders under the 622 contract (GSBCA 10120). Discussion The contractor contends that each of the terminations for default was improper. It seeks reversal of the terminations and withdrawals of the claims for reimbursement.[foot #] 2 The agency bears the burden of proof for both aspects of its claims--the terminations for default and the reimbursements. The record demonstrates that under the 622 contract, the contractor failed to satisfy the Quality Approved Manufacturer Agreement clause; did not have an acceptable point of production or inspection after December 1; and was failing to deliver acceptable levels of ratchet sets and pneumatic hammers under the purchase orders. The agency's termination for default of the contract is well-justified by the record. The record demonstrates that the ratchet sets delivered under the six purchase orders under the two contracts failed to comply with contract requirements. The principal failure was the unacceptably slow running speed of the ratchet set. The testings and conclusions of the agency are fully supported in the record. The contractor was obligated to take corrective action under the Quality Approved Manufacturer Agreement clause. The contractor failed to act in accordance with the clause. The resulting terminations for default of the purchase orders were justified. The conclusions and actions of the agency were neither arbitrary nor capricious. Contrary to the assertions of the contractor, the determinations were not made in violation of the provisions of FAR 49.402, 48 CFR 49.402 (1992), and were not inconsistent with the dictates of Darwin Construction Co. v. United States, 811 F.2d 593 (Fed. Cir. 1987). The contractor's failures to provide acceptable ratchet sets and pneumatic hammers did not represent isolated incidents. The contractor lacked a quality control system which would have assured the delivery of acceptable goods. The agency simply sought to enforce the terms of its contracts, which contained express requirements for adequate control processes, and for design and performance characteristics of the items. The contractor was unable to satisfy its contractual obligations to deliver acceptable items and to timely take corrective action regarding unacceptable items. The agency was not obligated to accept and retain unsatisfactory material. The agency appropriately rejected as unacceptable and returned ratchet sets under the two contracts. Having not justified its entitlement to a greater amount, the agency is ----------- FOOTNOTE BEGINS --------- [foot #] 2 In its post-hearing brief, the agency seeks reimbursement of $144,977.58. The agency offers no explanation for the variation from the figures in the termination letters. The Board views the agency claims as totalling $142,977.58. ----------- FOOTNOTE ENDS ----------- entitled to the amount it had paid for the items returned. The amount of recovery is limited to $155 for each item returned. Under the four purchase orders terminated under the 622 contract, the record demonstrates that 716 rejected sets were returned. Thus, of the agency's claim, the Board allows $110,980 ($155 x 716), and disallows $532.58 (the $.31 per unit sought in excess of $155, and the 2 additional sets not shown to have been returned). Under the two purchase orders terminated under the 629 contract, the agency has justified the entirety of its claim $31,465 ($155 x 203). Hence, the agency is entitled to $142,445 ($155 x 919). Decision The agency has demonstrated the appropriateness of the three terminations for default. The agency has fully justified its claim for reimbursement in the GSBCA 10119 appeal, and has justified all but $532.58 of its claim for reimbursement in the GSBCA 10120 appeal. Accordingly, the Board DENIES the appeals in GSBCA 10118 and 10119, and GRANTS IN PART the appeal in GSBCA 10120. The agency has demonstrated entitlement to $142,455. _________________________ JOSEPH A. VERGILIO Board Judge We concur: _________________________ _________________________ VINCENT A. LaBELLA JAMES W. HENDLEY Board Judge Board Judge