DENIED: June 21, 1993 GSBCA 10700 CHEMRAY COATINGS CORPORATION, Appellant, v. GENERAL SERVICES ADMINISTRATION, Respondent. Timothy S. Kerr of Starfield & Payne, Fort Washington, PA, counsel for Appellant. Michael D. Tully, Personal Property Division, Office of General Counsel, General Services Administration, Washington, DC, counsel for Respondent. Before Board Judges DANIELS (Chairman), HENDLEY, and VERGILIO. DANIELS, Board Judge. After the General Services Administration (GSA) terminated for the convenience of the Government orders for the supply of paint, the contractor, Chemray Coatings Corporation (Chemray), submitted a proposal for the reimbursement of costs associated with the termination. The parties are in disagreement as to Chemray's entitlement to recover manufacturing and overhead costs, and as to the amount of general and administrative expenses that GSA should pay to the contractor. The case has been submitted for a decision on the basis of the written record. Rule 11. We find for the Government on both matters and deny the contractor's appeal of the contracting officer's decision. Findings of Fact 1. On February 1, 1987, GSA awarded to Chemray a one-year requirements contract for the supply of enamel alkyd camouflage paint manufactured in accordance with Military Specification MIL- E-52798A(ME). Appeal File, Exhibit 1. This specification was prepared by the United States Army Research, Development and Engineering Center at Fort Belvoir, Virginia. Id. at 23; see also Complaint, Exhibit A-2. 2. The contract incorporates by reference clauses included in GSA Form 3507. Among these provisions is a standard clause permitting the Government to terminate the contract in whole or in part for its own convenience. Appeal File, Exhibit 1 at 16. This clause states, in part: (f) If the Contractor and the Contracting Officer fail to agree on the whole amount to be paid because of the termination of work, the Contracting Officer shall pay the Contractor the amounts determined by the Contracting Officer as follows . . . : . . . . (2) The total of -- (i) The costs incurred in the performance of the work terminated, including initial costs and preparatory expense allocable thereto . . . ; . . . and (iii) A sum, as profit on subdivision (i) above, determined by the Contracting Officer . . . to be fair and reasonable . . . . . . . . (h) The cost principles and procedures of Part 31 of the Federal Acquisition Regulation, in effect on the date of this contract, shall govern all costs claimed, agreed to, or determined under this clause. GSA Form 3507, 50; 48 CFR 52.249-2 (1986). 3. During 1987, the Government sent Chemray numerous orders for the purchase of paint under this contract. Complaint, Answer, 8. Chemray placed the work into its production schedule and purchased raw materials for the manufacture of the paint. Id., 9. 4. On June 2 and July 1, 1987, the contracting officer extended the dates by which several of the orders that had been issued to Chemray were required to be filled. Appeal File, Exhibits 2, 3. On August 7, the contracting officer again extended the due dates on several outstanding orders. Id., Exhibit 4. On September 3, he threatened to terminate the contract for default if a satisfactory explanation for the delinquency of fifty-one orders was not forthcoming promptly. Appeal File, Exhibit 5. 5. Meanwhile, at some time in July, Chemray learned that to comply with certain environmental laws, the Fort Belvoir Research, Development and Engineering Center had canceled the underlying specification, effective on July 1. Chemray asked GSA on July 28 what impact this action would have on outstanding orders. Complaint, Answer, 10; Appeal File, Exhibit 32 at 1. Six days later, the agency directed the contractor to fulfill all orders that it had received and would receive in the future. Complaint, Answer, 11; Answer, Exhibit A. Apparently toward that end, the contract was modified on September 8 to require the contractor to follow defense priority regulations "in obtaining controlled materials . . . needed to fill this order." Appeal File, Exhibit 6. The contracting officer later stated, without contradiction, that this modification was written to help Chemray obtain sufficient quantities of titanium dioxide, a scarce raw material used in the manufacture of the paint. Id., Exhibit 32 at 2. 6. On September 1, however, the Fort Belvoir Center wrote to all suppliers of paint meeting the relevant specification, stating that as of October 1, the paint would "no longer be acceptable for Army use." Complaint, Exhibit A-2. Seventeen days later, Chemray wrote to GSA expressing confusion about the requirements for the supply of the paint and saying that it would "suspend production of this paint until we receive a written reply." Id., Exhibit A-3. 7. GSA responded on September 25 by proposing that all outstanding orders (except those being tested) be terminated at no cost to either party. Appeal File, Exhibit 7. Chemray said that it had not and would not manufacture part or all of the paint covered by fifty-five orders; the contractor objected, however, to the Government's not reimbursing it for costs incurred. Id., Exhibits 9, 10. Without mentioning costs, GSA terminated the fifty-five orders -- fifty-three on October 14, one on November 9, and one more on February 11 of the following year. Id., Exhibits 11, 12, 14. 8. On September 29, 1988, Chemray asked that GSA reimburse it for "costs occurred [sic] by the untimely termination of [the] Contract." Chemray said that the sum of these costs was $243,066.59. Appeal File, Exhibit 15. In response to the contracting officer's request for a formal settlement proposal using GSA forms, the contractor submitted such a proposal on January 13, 1989, seeking $196,248.18. Id., Exhibit 18. 9. The GSA inspector general's office audited Chemray's proposal in March 1989 and released a report on July 21 of that year. The auditors questioned roughly half of the requested costs. Appeal File, Exhibit 23. Negotiations, during which Chemray provided some documentation and explanations, followed. Id., Exhibits 26-30. 10. Ultimately, the parties agreed on two elements of termination costs, raw materials ($90,248, including an agreed- upon profit of nine percent) and settlement expenses ($500). Appeal File, Exhibits 31, 32 at 3. In a decision issued on April 19, 1990, the contracting officer denied in its entirety Chemray's proposal that the firm be paid $49,977 in "other costs" (costs of manufacture and overhead) and partially denied Chemray's request for $29,776 in general and administrative (G&A) expenses. He allowed $5,796 in G&A expenses, as well as a profit of nine percent on that amount ($521.64). Id., Exhibit 32. 11. Chemray appealed this decision on July 6, 1990. The parties later realized that the decision had not been based on a certified claim. On November 2, 1992, they stipulated that such a claim had been made and that the contracting officer denied it for the reasons cited in his decision of April 1990. The parties agreed that if the Board were to rule for Chemray, interest should be calculated from the date of the stipulation. 12. Chemray placed into the record, for the purpose of explaining the basis of its claim for other costs and G&A expenses, a declaration of the firm's chief executive officer, H. Peter Tepperman. Mr. Tepperman explains: In order to recover its fixed operating costs and G&A expenses, Chemray allocates such costs on a percentage basis to each gallon of paint produced. It determines the appropriate burden rate by dividing the particular category of costs by the quantity of gallons to be produced. Declaration of H. Peter Tepperman (July 26, 1991) (Tepperman Declaration), 12. In this particular instance, he states: In keeping with its standard practice, Chemray had factored the terminated gallons into its production plan upon receipt of the relevant orders. The total planned production gallons for 1987, inclusive of the terminated quantity, was 1,376,322. Chemray's actual paint production for 1987 was 1,310,736 gallons. The difference between these two figures is 65,586 -- the number of gallons involved in the terminated orders. Id., 11. Also for the year 1987, Mr. Tepperman stated that Chemray's "other costs" were $1,282,125 and its G&A expenses were $756,614. Id., 14, 15, Exhibits 1, 2. Dividing these figures by the planned production amount yields burden rates of $0.931 (actually $0.932) for other costs and $0.550 for G&A. Id., 14, 15. Multiplying these rates by the number of gallons involved in the terminated orders yields what Mr. Tepperman calls "an underabsorption" of $61,060.57 in other costs and $36,072.30 in G&A.[foot #] 1 Id., 16, 17, Exhibit 3. 13. GSA's auditors questioned all of Chemray's proposed other costs because at the time of termination, the contractor had not yet begun production of the orders in question and thus had not incurred any direct production costs. The auditors believed that Chemray had not supported its contention that it had suffered an overall loss of productivity because of the termination, and that in any event, such a loss should be considered consequential damages, which are not recoverable under the Termination for Convenience clause of the contract. Appeal File, Exhibit 23, Appendix I at 1-2. The auditors questioned the G&A expenses because the contractor's assertions of gallons produced were not supported by production records, and thus could not serve as a basis for allocation of costs; they used instead the total cost of raw materials as an allocation base. Id. at 2- 3. The contracting officer adopted these positions in denying Chemray's requests for reimbursement of other costs and G&A expenses. Id., Exhibit 32. In response to the contention that production records were unavailable, Chemray provided the Government with only a single sheet of handwritten numbers whose meaning is neither explained nor readily apparent. Id., Exhibit 26 at 2d, 21st unnumbered pages. 14. Chemray maintains that the Government is obligated to reimburse the contractor for the claimed costs because "GSA's indecision and delay in terminating the [a]ffected orders prevented Chemray from substituting other work." Tepperman Declaration, 13; Appellant's Trial Brief at 4-6. The contracting officer's decision disagrees; it contends that Chemray's own delinquent performance was the cause of the firm's failure to produce the paint in question. In particular, the contracting officer asserts, Chemray's inability to obtain titanium dioxide (which GSA tried to help cure) caused the firm to curtail production during the relevant time period. Appeal File, Exhibit 32 at 5. Discussion In terminating a contract for its own convenience, the Government "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." 48 CFR 49.201(a) (1986). "Fair compensation is a matter of judgment and cannot be measured exactly." Id. It may not, however, include ----------- FOOTNOTE BEGINS --------- [foot #] 1 These amounts are greater than the sums Chemray seeks through this appeal. The discrepancy is not explained. ----------- FOOTNOTE ENDS ----------- anticipatory profits or consequential damages. 48 CFR 49.202(a) (1986). The ultimate objective is to make the contractor whole. Richerson Construction, Inc. v. General Services Administration, GSBCA 11161, et al., 93-1 BCA 25,239, at 125,704. For a cost to be allowable, it must be both reasonable and allocable. 48 CFR 31.201-2. "A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business." 48 CFR 31.201-3(a). "A cost is allocable if it is assignable or chargeable to one or more cost objectives on the basis of relative benefits received or other equitable relationship." 48 CFR 31.201-4. The contractor has the burden of "proving the fact of loss with certainty, as well as the burden of proving the amount of loss with sufficient certainty so that the determination of the amount of damages will be more than mere speculation." Lisbon Contractors, Inc. v. United States, 828 F.2d 759, 767 (Fed. Cir. 1987) (quoting Willems Industries, Inc. v. United States, 295 F.2d 822, 831 (Ct. Cl. 1961), cert. denied, 370 U.S. 903 (1962)). At issue in this appeal are two groups of alleged costs for which the contractor, Chemray, seeks recovery as a consequence of convenience terminations of numerous orders placed against a requirements contract: "other costs" (manufacturing and overhead costs) in the amount of $49,977 and general and administrative expenses in an amount $23,458.36 greater than what the contracting officer allowed. Chemray has not asserted that it ever began to manufacture any of the paint covered by the orders which were terminated. Indeed, the record before us supports a conclusion that no manufacturing was undertaken. Even before the Army canceled the underlying specification, and then announced that paint meeting that standard would not be acceptable, Chemray was delinquent in filling orders. Findings 4-6. The apparent reason for the delinquency was that Chemray could not obtain an ingredient that was necessary for making the paint. Findings 5, 14. If the contractor ever incurred any particular costs in preparing its plant to make the product whenever the key chemical might become available, Chemray has not shown them to us. No direct costs have been proven. Whatever costs might be awarded to Chemray are consequently indirect in nature. Chemray asserts that because it scheduled production of the paint covered by the terminated orders, it is entitled to recover from the Government a portion of the total manufacturing and overhead costs incurred during the calendar year in question. The contractor has not shown any connection between the scheduling and the incurrence of costs, however. We have no evidence whatsoever as to the impact of the orders and subsequent terminations on plant operations. Although Chemray may have wished, and even expected, to recover some of its manufacturing costs through the sale of the paint in question, the contractor's scheduling of production by itself does not obligate the Government to pay some of those costs. Chemray has not shown that the agency contributed to any delay in manufacturing -- an action which would make the Government responsible for the contractor's unabsorbed overhead. See Worsham Construction Co., ASBCA 25907, 85-2 BCA 18,016, at 90,370. As to the G&A expenses, Chemray has proposed the allocation of costs in accordance with a basis that is unsubstantiated. Without making any conclusion as to the validity of Chemray's thesis that costs should be allocated by unit of planned production, we find that the record contains no credible evidence of any production at all. See Finding 13. This problem is especially egregious because GSA's audit noted the absence of such evidence, thus placing Chemray on notice that documentation was essential to convince the decision-maker that the proposed method of allocating G&A expenses was reasonable. The contractor has therefore given us no cause to alter the contracting officer's method. See Findings 10, 13; Malissa Co. v. United States, 18 Cl. Ct. 672, 674 (1989). Decision The appeal is DENIED. _________________________ STEPHEN M. DANIELS Board Judge We concur: _________________________ _________________________ JAMES W. HENDLEY JOSEPH A. VERGILIO Board Judge Board Judge